What is life insurance?
Life insurance is a contract between an insurance policy holder (you) and an insurer (insurance company) where the insurer will pay a designated beneficiary a sum of money upon the death of the insured person. There are different types of life insurance depending on your specific needs, including term life insurance, permanent life insurance, accidental death insurance, and more.
Who needs life insurance?
Your need for life insurance depends on many different factors such as your age and responsibilities. There are many reasons to purchase life insurance. If someone will suffer financially when you die, chances are that you should get life insurance. In addition to helping to support dependents, life insurance can help provide immediate cash at death. Insurance proceeds are a handy source of cash to pay the deceased's debts, funeral expenses, and income or estate taxes.
Single people who have no children or dependents, most of the time, will not require life insurance.
Different kinds of life insurance
Not all policies are the same. Some policies give coverage for your lifetime, while others give coverage for a specific number of years. Some policies gain cash value and some offer benefits. The two main types of life insurance are below.
Generally speaking, term offers the greatest coverage for the lowest initial premium and is a great solution for people with temporary needs or a limited budget. Permanent insurance may make more sense if you anticipate a need for lifelong protection, or if the option of accumulating tax-deferred cash values is attractive to you.
Term assurance provides life insurance coverage for a specified term. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
- Face amount (protection or death benefit),
- Premium to be paid (cost to the insured), and
- Length of coverage (term).
Annual renewable term is a one-year policy, but the insurance company guarantees it will issue a policy of an equal or lesser amount regardless of the insurability of the applicant, and with a premium set for the applicant's age at that time.
Level premium term can be purchased in 5, 10, 15, 20, 25, 30 or 35 year terms. The premium and death benefit stays level during these terms.
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher. Permanent life insurance cannot be cancelled for any reason except fraud, as long as the owner regularly pays his premiums. Any such cancellation must occur within a period of time (usually two years) defined by law. A permanent insurance policy accumulates a cash value.
How much life insurance you need
The amount of insurance you need depends on many factors and will vary from person to person depending on his or her needs and wants. The GEICO Insurance Agency recommends that each family income provider carry no less than ten times their annual income/worth in life insurance. Start by asking yourself these questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death?
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
One thing often overlooked is the amount of your outstanding mortgage should also be a consideration. Any coverage for your mortgage should be in addition to the amount of insurance you calculate for your income coverage.