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Types of Life Insurance | How Much Life Insurance Do I Need? | Permanent Insurance | Term Life Insurance | Index Life Insurance

Why should I buy life insurance?

 

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

 

Replace income for dependents
 

If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.

 

Pay final expenses
 

Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.

 

Create an inheritance for your heirs
 

Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.

 

Pay federal “death” taxes and state “death” taxes
 

Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.

 

Make significant charitable contributions
 

By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.

 

Create a source of savings
 

Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).

 

 

Should I buy life insurance on my child’s life?

 

The main reason for buying life insurance on anyone’s life is to replace income “lost” or pay for expenses caused by the death of the insured person. If your child dies, there’s no lost income, but there will be funeral, burial and related expenses that could run to thousands of dollars, which might cause a financial hardship to the parents of the deceased child.

Another reason for buying life insurance on a child’s life is to guard against the possibility that, when the child is older, he or she might not be able to buy life insurance because of intervening illness or other circumstance.

Still another reason for buying life insurance on a child’s life is part of a program to teach the child financial responsibility. Typically the insurance is whole life insurance, ownership of which is transferred to the child when he or she turns 21.

Most insurance advisors recommend that families spend their insurance budget to buy life and disability income insurance on the parents first, before considering insurance on children’s lives. Death of a parent, particularly an income-earner, could have financial consequences that are devastating compared to the financial effects from a child’s death.

 

 

What is “burial insurance”?

 

“Burial insurance” usually refers to a whole life insurance policy with a death benefit of from $5,000 to $25,000. As its nickname implies, people buy this type of policy to provide money for funeral and burial costs for themselves and/or family members. It is possible to buy a policy after answering a few health-related questions on the application and with no medical exam.

Premiums are payable weekly or monthly. The premium is usually collected at the policyowner’s home or workplace, and the premium is usually a small round number, such as $2 or $3 per week; the death benefit is whatever that premium will buy given the insured’s current age. For example, a $3 per week premium might buy a $6,000 death benefit for a 36-year-old man or an $18,000 death benefit for a 9-year-old boy.

Burial policies may be designed to cover one person or everyone in a family.

Under some state laws, funeral homes may be licensed to sell burial insurance, but it is mainly sold through brokers and agents of insurance companies licensed to sell life insurance.

An approach that is similar to burial life insurance (and sometimes called burial or “pre-need” insurance) is pre-payment of your funeral arrangements. Under this program, you may select the funeral home, type of service, casket (or cremation), flowers, headstone, burial plot, the cost of digging and filling the grave, and other items, and lock in the prices for them by paying in advance.

 

Where can I get additional information on life insurance?

 

For more detail on life insurance, you can contact:

 

American Council of Life Insurers
1001 Pennsylvania Avenue
N.W., Washington, D.C. 20004-2599
202-624-2000
www.acli.com

 

Life and Health Insurance Foundation for Education
www.life-line.org

 

Source:  Insurance Information Institute  www.iii.org

VIDEO: Stop / Play  Life Insurance 101