Life Insurance Basics - What is Life Insurance and What is it Good For?

April 14, 2007 | By Guardian In Insurance, Life Insurance Tips, Life Insurance Basics | Comments(0)

Auto Insurance Basics

What Is Life Insurance?

The goal of life insurance is to provide a measure of financial security for your family after you die. In simplest terms, life insurance is a contract providing protection if you die – ensuring that your family will continue to have financial protection after you are gone. In exchange for your premium payment(s), the insurance comany agrees to make an agreed-upon payment to the beneficiaries designated in the policy.

Before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for those who depend on you:

Who will be responsible for your funeral costs and final medical bills? Would your family be able to afford your mortgage payments? Will there be enough money for future or ongoing expenses such as daycare, credit card bills, and college?

Many advisors suggest that you review and reevaluate your life insurance when you experience a major life event such as marriage, divorce, a new child, or purchase of a major item such as a house or business.

One way to evaluate your need for life insurance is to look at the stage of your life and your financial means. Different types of insurance suit different life stages, needs, and financial abilities. Take a look at the following examples:

Single

At this stage, because you do not have a spouse or children who depend on you, no one will miss your income if you die (gold-digging girlfriends excluded). Although insurance may not be a necessity at this stage, you still may want to consider purchasing a policy because rates generally are lower and you may be able to lock them in for several years.

Married

Financial planners generally recommend a small amount of life insurance at this stage - even though you don’t have children, if you die, the death payment under the policy would pay for mortgage/rent payments, credit card debts and funeral costs.

Married with Children

Life insurance can become critical once you have children because your family would be in dire circumstances if you were to die.

Retirement

At this stage of your life, your kids no longer rely on your income (except for that deadbeat son who won’t leave the basement), and you are likely living off of your retirement funds. Although you might not need as much life insurance during this stage as compared to earlier in your life, you still will want to have some coverage for funeral expenses, debts, and to supplement your surviving spouse’s retirement money.

Why Should I Buy Life Insurance?

There are many reasons for purchasing life insurance, including:

  • To provide family protection and financial security to surviving family members upon the death of the insured person.
  • Insurance to cover a particular need such as paying off a mortgage or other debt upon the insured’s death.
  • Business insurance to compensate a company on the death of a key employee or to provide a surviving partner the resources to buy out the deceased partner’s share of the business.
  • Insurance to provide funds to pay estate taxes or other final obligations necessary to settle a deceased person’s estate.
  • Insurance to provide the funds necessary for the deceased person’s burial expenses.

    • When you buy life insurance, you want a policy that fits your needs at a reasonable cost.

    Your first step is to determine how much life insurance you need. Next, you need to decide how much you can afford to pay. Finally, you must choose the type of policy that meets your coverage goals and fits into your overall financial plan.

    Once you complete these steps, you should contact several life insurance companies to shop for the right type of policy for your individual circumstances.

    Happy insurance shopping!


    Filed under: Insurance, Life Insurance Tips, Life Insurance Basics