Life insurance is a simple concept: You buy a policy that pays your beneficiary or beneficiaries when you die. In most cases, that means protecting your family's home and lifestyle in case something should happen to you. Basically, you buy life insurance to make sure that everybody who's important to you is cared for.
Not everyone needs life insurance:
- If a person has no dependents, or if both partners in a relationship make enough money to support them in case one of them died, life insurance is not needed.
- If there are sufficient funds available to provide for the dependent survivors' long-term needs without depleting the financial resources, there is no need for life insurance.
But other groups of people do need life insurance:
- If a person has dependents, a spouse, children, parents, even charitable organizations who rely on their financial support.
- If a person provides a service that would have to be provided by (and paid to) somebody else after their death.
When considering life insurance, you should make sure that it provides enough of a benefit to meet your family's or beneficiaries' needs if you (and your salary, service, or payments) aren't there.
Start off with a number in mind of what your family must have in terms of a death benefit: consider payments for mortgage, cost of living, debt, college, and retirement.
Next, consider which type of policy will best suit your needs:
- Provides coverage for specific periods of time, including a 30-year mortgage, or raising children.
- Can be purchased at a fixed premium rate for various term lengths (5, 10, 20 or even 30 years) avoiding potentially huge annual premium increases.
- When the term ends, so does the insurance coverage. Term Life Insurance will only pay if you die within the term.
Permanent, Whole Life or Cash Value Life:
- Often used if you have significant assets, if you want to be sure that estate taxes are covered, if you want to support a surviving partner's retirement funds, or if you want to be sure to have enough money to pay for your funeral expenses. Permanent life insurance will pay when you die, no matter how old you get.
- Based on a client paying higher rates (making overpayments) in the early years, and comparatively lower rates later on, when health, age and mortality rates would call for much higher rates.
- Overpayment made in the early years is set aside, and can be accessed by the client. By law, the insured is entitled to a refund of the overpayment when the policy is canceled, hence the term "Cash Value".