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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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