Life insurance is a financial safety net one provides his/her family or business in the event of your premature death. It doesn't have to be confusing or complicated.
What is personal life insurance?
Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death.
Why should I buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:
- Replace income for dependents
If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
- Pay final expenses
Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
- Create an inheritance for your heirs
Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
- Make significant charitable contributions
By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy's premiums.
- Create a source of savings
Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner's request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of "forced" savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).
How Much Is Enough?
How do you figure out how much life insurance you need? A ballpark measure sometimes used is between five and seven times current net income. But to work out the specifics of your own situation, you'll want a financial needs analysis. It gives you a picture of the capital your survivors need when you die. It looks at assets that would be available to them, liabilities they would have to deal with, and continuing family or business needs for income.
An Advisor can help you work out a more comprehensive financial needs analysis. Let us help you, contact your Advisor or our office for assistance.