Items to Consider When Buying Life Insurance
Who Needs Life Insurance?
Life insurance provides a simple answer to a complex problem. How will those who depend on me survive when I die? Those “dependents” may be a spouse, your children, aging parents, a business partner or a key employee. If someone is depending on you, either financially or for the value of services you perform for them you may need life insurance.
Where Do You Start?
Life insurance is simply the means to an end. A good way to start is by thinking about what you would want to see happen to those who are relying on you if you were no longer around to provide for them. Jot these items down on a piece of paper and move on to the next step. Talking with your life insurance agent or financial advisor may help you clarify some of these items.
How Much Do I Need?
There are many methods suggested in the financial press for determining how much life insurance you need. As everyone’s financial situation and goals are different there is not a hard and fast rule as to which one you should use, but a good starting point is to determine your family’s ongoing needs taking into account living expenses, children’s educational needs, your current debt and spouse’s retirement needs if you are not around. This method is also known as a “financial needs analysis”. I suggest you discuss your individual needs with your financial advisor, or insurance agent. You may also want to visit the life insurance needs calculator1 by clicking here.
How Long Will I Need Life Insurance?
This is probably one of the toughest questions to answer. When you are young and starting a family you may think you need life insurance until your youngest child is out of school and out of the house. But situations seem to change and as you get older the purpose for the life insurance may also change. It may be that once your children are almost out of school you decide to start your own dream business. This new situation may create a new purpose for the life insurance you originally bought. This new purpose may be to cover the debt on a start up business or to replace lower earnings during the start up phase of your new venture. Because of the unique requirements for purchasing life insurance and the different contractual terms of different policies, some early planning and annual reviews will become beneficial.
What Types of Insurance are There?
There are two primary types of insurance, permanent insurance and term insurance. Within these two categories there are numerous variations.
Term Insurance – in its simplest form will last for a certain period, as long as the premiums are paid. If you die during that “certain” period, while the policy is in force a death benefit is paid to your beneficiaries.
Permanent Insurance – in its simplest form last for your lifetime, accumulates a cash value (which may be accessed) and pays a death benefit to your beneficiaries when you die, as long as the premiums are paid and the policy is in force.
There are advantages to each type of insurance and each type solves different problems and comes with different guarantees. There is not a hard and fast rule as to which type you should own. Each individual’s situation is different.
Selecting a Beneficiary
Your beneficiary is simply the person you want to receive your life insurance death benefit when you die. In most situations this will be your spouse, or children. In more complicated situations it may be a trust, business entity or business partner. In some situations you should seek the advice of an estate planning or business attorney when naming your beneficiaries. It is suggested that you review your beneficiary designation on an annual basis and any time you have a life changing event such as; a marriage, birth of a child, adoption, divorce, death of a spouse, and remarriage to name a few. Also remember to name a contingent beneficiary. If your beneficiary dies before you do and you do not have a contingent beneficiary, the life insurance policy death benefit will be paid to your estate. This may or may not be what you want to happen and it may not be in your family’s best interest.
The above points are some of the main items to consider when thinking about life insurance, but the list is certainly not all inclusive.
I encourage you to review your life insurance needs on an annual basis with your insurance agent, or financial advisor. Because of the long term nature of life insurance and the unique requirements for purchasing or changing a life insurance policy an annual review is the best way to get the most value from this type of financial product.
You should hope for the best but plan for the worst and remember
“Life insurance isn’t for the people who die.
It’s for the people who live.”2