Life insurance is a form of insurance that pays a beneficiary in the event of the death of the insured person. When a policy is purchased, a specific death benefit is chosen. Life insurance is a contract between the policy owner and the insurance company:
- the policy owner (or policy payer) agrees to pay a defined amount called a premium.
- the insurance company agrees to pay a sum of money upon the death of the insured person.
- the beneficiary – the person or persons named by the policy owner – will receive policy proceeds (benefit) upon the death of the insured person.
Do you need Life Insurance?
If you provide financial support, or provide such services as child care, cooking, and cleaning for your family, life insurance can help replace those contributions to the family if you should die. Older couples also may consider life insurance to protect a surviving spouse against the possibility of the couple’s retirement savings being depleted by unexpected medical costs.
If there are people who depend on you financially (including children, a spouse, a business partner, disabled or elderly relatives), having a life insurance policy will protect them when they can no longer count on your earnings.
If you have a mortgage or other financial obligations, a life insurance policy can help pay off debts and provide living expenses to the people you name as beneficiaries.
A key question to ask yourself is:
Are there people who depend on me financially? If so, life insurance can provide for their needs if you should die.For most people, the need for life insurance will be highest after starting a family and will decrease over time as children grow up and become independent. Life insurance can help make sure future needs are met and that your family maintains its standard of living, no matter what life brings.
How much Life Insurance is enough?
Multiply your family’s annual expenses, allowing for inflation, using the number of years in the future you believe your dependents would need your support. Remember to include the future costs of items you want to pay for such as a mortgage or educational expenses. Some options to consider:
What are possible education costs for dependents, whether a child or an adult who might need to enter the workforce after the death of the primary provider?
Some advisors recommend an amount of life insurance that equals or exceeds two to six times the annual income of the policyholder. However, this figure should be adjusted according to the number of dependents, their relative ages and unique needs of the family.
What are different types of Life Insurance?
The primary purpose of life insurance is bad credit loan South Carolina to provide for dependents should the family provider die. However, there are differences in types of insurance that allow different benefits and risks. Some types of life insurance are for a specific “term” or period of time. Some types of life insurance include the accumulation of cash value in exchange for a higher premium.
The next sections describe the differences between basic types of life insurance, as well as how to determine who should be insured.
The three main categories of life insurance are term life, whole life, and universal life, although there are options within each category:
Term life insurance
Term life insurance is the simplest and least expensive type of policy, with no cash value. A term life policy has only one function: to pay a specific lump sum to the beneficiary that has been designated, upon a specific event: the death of the insured person. The death benefit and the policy limit are the same – for example, a $200,000 policy pays a $200,000 death benefit. The policy protects your family by providing money to replace your salary, income or other contributions, as well as covering final expenses incurred at death. As agreed in the contract, the premium must be paid, and if you stop paying, the policy ends (lapses.) You won’t owe the insurance company and they won’t owe you a refund for the premiums paid if it lapses before the end of the term. If the insured person is still alive at the end of the term, you do not get your money back. A term insurance policy is over unless you can renew the policy. If you renew (if the policy has that feature), it will renew at a higher price reflecting the current age of the insured person. Term insurance has no buildup of cash value as some other types of insurance allow. (There are some term life insurance policies that offer a return of premium; be sure you understand the policy you are buying.) Term insurance is for people who don’t need life insurance for an indefinite period of time. It provides for people who depend on you, but generally ends by the time children are grown and independent, often when the policy owner is ready to retire.