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What is life insurance and do I needed?
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Different types of life insurance.
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How much should it cost?
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Who should actually own the policy?
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FAQs on insurance
Life Insurance: Do I need life
insurance?
Here's a piece of advice your insurance agent
may not share with you: Not everyone needs life insurance. The basic purpose of
life insurance is to offer financial protection to your loved ones in the event
of your untimely death. So you only need life insurance if someone is relying on
your income and would be affected financial when you are not around. Here are
some of the questions you should ask yourself: Could your spouse continue to pay
the mortgage or raise the children? Would there be enough money to pay your
debts, or to pay for college for your children? If you’re divorced, how can you
be sure that child support obligations will be fulfilled?
If you’re single, with no dependents, you may
not want life insurance at all. Some employees get some life insurance through
work. Usually it equals a year or two of your annual salary. If you earn $30,000
per year, you might get a life insurance policy worth $30,000 to $60,000.
Typically, your insurance at work will provide for a decent burial. And your
personal debts will not be the responsibility of your loved ones. A life
insurance policy could fund a bequest to a charity. But unless you support your
parents, they’d have a difficult time deciding what to do with the proceeds of a
policy on their child’s life. $60,000 might sound like a lot, but if you have
children and a stay-at-home spouse, it won't last long--even if your spouse also
gets your monthly (or lump sum) pension and social security.
Life insurance is a benefit that you hope
you won't need (at least not soon anyway) but you would be foolish to do
without. Remember that life insurance is usually the major source of cash for
beneficiaries. In most states, proceeds are exempt from the claims of the
deceased's creditors and it is usually not subject to probate. Because
beneficiaries avoid probate and receive the face value of the policy tax-free,
make sure you name contingent beneficiaries. If not, and your primary
beneficiary predeceases you, the insurance proceeds of your policy upon your
death will become part of your will and will end up in probate court. Also
naming your young children as beneficiaries may not always be a smart move
because insurance company will not pay proceeds to a minor until a court
approved guardian is established.
How much life insurance
is enough?
That’s the most critical question of all. Insurance agents develop formulas, but
they don’t apply in every situation. It's recommended to have anywhere from five
to 10 times the amount of your annual income, after taxes in life insurance
coverage. Monthly payments are usually taken directly out of your bank account
and vary depending on what kind of insurance policy you purchase. It is also
recommended to have six months to one year's salary as a "just in case" fund,
especially with first-time parents.
Bottom line, ask yourself this question: Would I work the rest of my life for no
pay in exchange for a single lump-sum tax-free payment in the amount of the life
insurance I own? If the answer is yes, you probably have enough. If not, you
don’t.
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Life insurance on your
child?
It might sound like a great idea, at
first. What parent doesn't want to protect his or her child as much as
possible? But think about it--how does buying a life insurance policy on
your child's life protect the child? It doesn't. If your child dies, it
would be a tragedy. But a child's death does not normally create a
financial hardship for the child's family. Remember that the purpose of
life insurance is to replace income after a death. Unless the child is a
celebrity, no income is lost if the child dies.
A child's death does create one
short-term financial problem: funeral expenses. But buying a life
insurance policy just for that purpose doesn't really make sense. Instead,
think about saving the money you would spend on insurance premiums. Open a
savings account, or put the money in some type of investment vehicle. That
way, the money can be used for college expenses or a first home, but it
will also be available in case of a tragedy. |
Next -->> Different
types of life insurance
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