Life Insurance 101
Life insurance is available under many names and can have many frills, complications and purposes, but they all offer only two basic alternatives: Term Insurance and Cash-Value Insurance. These two types are similar in some respects, but different in many others. Here are the basics of each:
A term insurance policy insures your life – Pure and simple…In fact, it’s often referred to as “pure insurance”. You pay a premium for a designated period of time, generally between one and twenty years, and if you die, your beneficiary receives the insured amount. If you live and want to continue your coverage, the policy must be renewed.
This is insurance that remains in effect, not for a specified period of years, but rather until you discontinue it, or until its benefits are paid out. In addition, part of the premium you pay is set aside for you in what amounts to a savings account that earns a dividend. This money belongs to you whether you keep the policy in force or not.
An overlooked feature of life insurance are the following: Upon death, the insured’s beneficiary will receive the “death benefit” in cash, free from any income tax, and the proceeds can be used for any purpose.
While there are a wide variety of reasons why someone should consider the purchase of life insurance, the primary reason is indisputable. If your death will create a financial hardship for someone, family or others, you need life insurance. That’s the easy part. The difficult part is quantifying the financial hardship. This is best done by defining the financial needs in the following categories:
This would cover the first six months or so and would include such expenditures as:
- funeral costs
- final healthcare bills
- attorney fees
- current monthly obligations
- grieving comfort
This six month period is somewhat subjective since it attempts to cover the families grieving and emotional struggles caused by the loss of a loved one.
This would cover the period of time until the children can survive on their own and would include basics such as:
This category is reasonably predictable in that the expenses can be calculated for a specific number of years related to the current ages of children and expectations of when they will be on their own.
This would cover the surviving spouse after the children are on their own and would include most of the items addressed in the Intermediate category, albeit in lessor amounts:
While this category is reasonably predictable as to the monthly expenditures, it is difficult to predict how long they will need to last. Nowadays, it is very common for seniors to live well in to their nineties, making it more difficult to estimate the amount of funds needed for peace of mind.
The variables that can and will impact the actual expenditures in each of the categories are many and varied; no one can be expected to estimate the correct number with any degree of precision. Additionally, over time, you can expect your need for life insurance to change. But fortunately, the cost for protection can be a bargain, allowing you to provide adequate coverage for your changing needs without breaking the bank.