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Life Insurance 101

August 2017

Life Insurance 101

Have you considered getting life insurance? Do you know the basics? Term or permanent? Does everyone in the family need a policy?

While life insurance has been around for ages, many are unclear about what it is and if they should invest in a policy. Here are the basics:

What is life insurance?

Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. You can elect multiple beneficiaries and allocate a certain percentage to each for the payout.

What is life insurance typically used for?

In short, it replaces lost income when someone dies. For instance, if a spouse passes away, and they were bringing in a paycheck, that income is now gone. Proceeds from a life insurance policy make cash available to support your beneficiaries almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind like mortgages, car loans and credit card debts, and it can be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?

This amount will vary by individual. For example, do you have a spouse and family members relying on your income? How big is your mortgage? How many financial obligations do you have? Will you ultimately have college educations to fund? Do you have a significant other relying on future retirement savings? Financial needs vary over time, so life insurance policies and needs should be reevaluated, especially after big life events (the birth of a child, the purchase of a new home, retirement). A financial planner can help you come up with an appropriate coverage amount, but generally you want enough to cover your debts and ensure your loved ones are taken care of with the loss of your income.

If you don’t have anyone to support, have already raised your children, or have sufficient assets saved, you may not need to pay for life insurance.

Are there different types of life insurance?

Yes. The two primary coverage types are term and permanent.

Term life insurance provides protection for a specific time period. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years, or more.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy active. This option is typically more expensive, and if the policy owner ever discontinues the policy, this reserve, known as the cash value, is returned to the policy owner.

It is important to note that life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.

How is the cost of your life insurance policy determined?

Rates are determined by several factors, including overall health, family medical history and lifestyle. Tobacco use, for example, would increase risk and therefore cause your premium payment to be higher than that of someone who doesn't use tobacco. Some life insurance companies will require you to complete a physical to assess your current health before delivering you a rate.

Where can you buy life insurance?

In some cases, you can purchase life insurance through your employer. The employer may offer you a base amount, and then you can pay for a higher amount of coverage. You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Life insurance is usually something we don’t like to think about, because it’s only needed if you die. Still, if you have loved ones and financial obligations that warrant an income stream, it is something you should work into your overall financial planning.

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