Life Insurance Basics

This article is contributed by LegacyShare.  We are the leading service helping you share your legacy with the ones you love and trust so you can confidently know your legacy will transition smoothly.  Please visit our website at legacyshares.com to review our services and to set up your legacy transition today.

What is life insurance?

Life insurance is contract between you (insured) and the insurer.  Under the terms, the insurer promises to pay your beneficiary a certain amount upon your death. The insured makes premium payments to the insurer to maintain the policy/agreement. The proper amount of life insurance coverage provides the insured a feeling of confidence that those that you care about are financially protected after you die.

The many uses of life insurance.

Once of the main reasons for purchasing life insurance is to provide your loved ones/beneficiaries with the loss of income that will occur after your death.  When you die and the paychecks stop your family may be left with limited income, life insurance is meant to immediately address this income gap.  Life insurance can also be used to pay any debts or liabilities. It can be used to pay off mortgages, car loans, student loans, credit card debts and other liabilities.  The leftover proceeds can be used to support your family, fund financial goals or pay funeral expenses.

How much life insurance do you need?

Your need will depend on many different factors, including if you married, size of family, financial obligations and financial goals. For example, when you are young, you may not have a need for life insurance. However, as you get older and take on more responsibilities and your family grows, your need for insurance increases.

There are many tools you can use to help determine how much coverage you may need.  One resource is working with a financial professional.  A most basic approach might include asking yourself the following questions:

• What are your immediate financial obligations (debt, funeral expenses) your family would face upon your death?
• How much are your dependents relying on your current salary?
• Are your financial goals funded?
• How much money would you want to leave for special situations (education expenses, charity, inheritance)?
• Have your needs changed, and do they need to be re-evaluated?

Types of Life Insurance.

The two basic types of life insurance are term and permanent (cash value) life.  Term insurance provides protection for a certain amount of time.  If you die during the coverage period, your beneficiary receives a death benefit. If you live to the end of the term the policy simply terminates unless you choose to renew it (typically at a much higher rate).  Term periods are available between 1-35 years. The premium is level throughout the term, it will typically go up if you renew the policy when the initial term is exhausted.

Permanent life insurance protection provides protection for your entire life assuming you continue to pay the premium to keep the policy in force. Premiums are typically greater than necessary at the early years of the policy in order to build up enough reserve to help makeup the shortfall in the later years of the policy.  If you were to cancel the policy, the reserve (cash value) is typically returned to the policyowner after any applicable surrender or early withdrawal charges. There are various types of permanent life insurance:

• Whole Life: it is guaranteed to stay in place if the set insurance premium is paid and the policy does not lapse.
• Universal Life: excess premium payments (after cost of insurance) are credited to the policies cash value where it can earn an interest rate.
• Variable Universal Life: a policy that builds cash value as well, but the excess premium can be invested in wide spectrum of investments similar to mutual funds that contract owner can allocate into the available options as he/she chooses.

Your beneficiaries.

You must name a primary beneficiary to receive the death benefit.  You may name a contingent beneficiary to receive the proceeds in the event your primary beneficiary dies before the insured. You may have many beneficiaries and they can be a person, an organization or corporation.  You can specifically choose what percentage each beneficiary will receive.  It is important to strongly consider what your beneficiary will receive to ensure your wishes are carried out how you would like. Also, you can change your beneficiary at any time and typically only requires simple paperwork by the insurer.

Where can you buy life insurance?

Many employers will have life insurance as part of their benefit plan.  You may also buy insurance through a licensed professional (life insurance agent or broker) or directly from a life insurance company.  Keep in mind, any policy you buy is as good as the company issuing it. It is important to investigate the company you are purchasing from and use rating services such as A.M. Best, Moody’s and Standard & Poor’s.  The insurance company should provide you this information.

It is important to have a life insurance plan in place to properly protect your loved ones and to leave them without a financial burden.  LegacyShare is a perfect place to store your policy summary statements or to notify your “keyholder” that your protection plan includes insurance coverage to aid your loved ones in the continuation of pursuing their financial goals.

Legacies are meant t be shared.

-LegacyShare