Life insurance is a great way to protect your assets for your future benefit as well as for your family. Life insurance can also help aid in the transfer of your wealth for estate planning purposes. Insurance benefits are not taxed, provide income to your beneficiaries when you die, and can be used to pay estate taxes. Generally, policies can range from $50 per month to a single lump-sum payment (depending on the amount of insurance purchased along with the age and health of insurer).
Term life insurance provides a level premium and a level-death benefit protection for a stated period of time, such as 10 or 20 years. Term life insurance can be a good fit for younger individuals and families, who need protection against the loss of income of a primary earner for a stated period of time, at an affordable cost. It has no savings component. Depending on the type of insurance you select, a medical examination will be required. Permanent life insurance typically provides both a death benefit and a savings component. There are different types of permanent life insurance, including whole life, universal life, index-universal life, variable life and variable-universal life. Permanent life insurance may provide protection for your entire life. If a guaranteed level premium is important to you, make sure your policy provides for one. Permanent life insurance accumulates a cash value, and the policy owner may be able to borrow against it tax-free or use it for retirement or other goals (like education). Premiums are initially higher than for term coverage.
Term life insurance doesn't allow you to build up cash-value, so it's usually the least expensive type of insurance you can buy. You purchase protection (the "death benefit") for a fixed dollar amount for which you pay a fixed cost every month. You are protected for the "term" of your policy, which could be up to 20 years. If you die during that time period, the death benefit is paid to your beneficiaries tax-free.
Permanent life insurance allows you to choose the amount of protection to buy while building up cash value that earns interest tax-deferred. There are many types of permanent insurance that guarantees you stay protected as long as you pay your insurance premiums. Some have a fixed cost for your lifetime, while others have premiums that may change. Guarantees on Life Insurance policies are based upon the claims paying ability of the Issuing Company.
Ask yourself the following questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after my death?
- Do I have family members or organizations to whom I would like to leave money?
- Will there be estate taxes to pay after my death?
- How will inflation affect future needs?
Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.
You may have enough coverage from your employer, however, you will want to think about what will happen to that coverage if you leave your current employer. Is it portable? Will the premiums go up as you get older?