Life Insurance Basics

Life Insurance is designed to provide your family with financial protection in the event of your death. It allows your beneficiaries to receive a payout that can be used to cover funeral costs, pay off a mortgage, or provide income for your children’s education.

While the payout from a life insurance policy is usually a lump sum, some policies allow for other types of payouts including a retained asset account, a life income with period certain, or an annuity. The type of payout your beneficiaries choose to take depends on their needs and may be influenced by factors such as their age, health, lifestyle, or current savings.

How Much Life Insurance Do You Need?

To determine the amount of life insurance you need, start by adding up your major expenses such as income replacement, a home loan or mortgage, children’s college tuition, and debt payments. Then subtract your current savings, existing life insurance and retirement funds to find the amount of coverage you need. Keep in mind that your life insurance rates will increase as you get older.

Choosing the Right Life Insurance Policy

Typically, the most important decision in selecting the right life insurance is how long you want to be covered. A term life policy provides coverage for a specified period of time such as 10 or 20 years. If you die during the term, the insurer pays the face value of the policy. If you live longer than the term, no benefit is paid.

Whole life insurance, on the other hand, provides coverage for your entire life as long as you pay premiums. In addition, some portion of each premium payment accumulates in cash value based on a set of assumptions for investment earnings, mortality, and expense charges. You have the option to change your “current” premium based on these assumptions in later years but it can never be higher than the maximum guaranteed premium stated in the policy.

Some whole life policies also offer the flexibility to borrow against the cash value. However, you should be aware that if you do this, the amount of the loan will reduce your death benefit and the total policy.

Once you’ve chosen the type of policy you need, there are a few additional steps to take to file a claim. The sooner you contact the company, the sooner they can begin processing your claim. Make sure you have all the necessary paperwork, such as a claim form and death certificate, to make it as easy for them to process your claim.

While the purpose of life insurance is to provide your loved ones with peace of mind after you die, it is a good idea to review the names of your beneficiaries on a regular basis as circumstances and relationships change. You should particularly review your beneficiaries following a major life event such as a birth, adoption, marriage, divorce, or remarriage and after any significant changes to your health or lifestyle that could impact the amount of coverage you need.