Life Insurance Basics

Life Insurance Basics

Preparing for your family’s future goes beyond investing to meet your goals and objectives. A key component of ensuring your family’s future is financially stable is obtaining the right amount and the right kind of life insurance. Life insurance can help reduce the financial impact your passing could have on your loved ones. Among many other things, it can provide your family with the opportunity to replace lost income, pay educations expenses, eliminate debt, or maintain their current lifestyle.

When you take out a life insurance policy, you are entering into a contract with the issuing insurance company. Life insurance provides a payment of a preset amount to your beneficiaries in the event of your death. Often, this payment is income tax free. The funds are paid directly to your beneficiaries, avoiding probate and the costs and time associated with it. Depending on the size of your estate, the benefits paid from the life insurance policy may be subject to estate tax.

There are two general forms of life insurance: term and permanent. Term policies cover a specific term or period, such as 10 to 20 years. Once the term period ends, premiums are no longer due, and the coverage terminates. Term insurance is most frequently used to replace lost income in the event of a premature death. Term insurance is generally more affordable and more appropriate than permanent insurance. A permanent policy remains in effect until your death, provided your premium payments are up to date. Permanent insurance is often coupled with an investment component, which results in higher premium payments. Permanent insurance is most commonly used as a vehicle for wealth transfer and estate planning.

Life insurance becomes necessary when you have dependents relying on your income. You may be able to get life insurance via your employer or you can purchase the coverage independently. As major life events occur, they offer the opportunity to purchase life insurance for the first time or to review the insurance you currently have in place and make changes as necessary. Examples of these include getting married, the birth of a child and the purchase of a new home. When it comes time to purchase a life insurance policy, generally you must provide evidence of insurability. Before the insurance company will issue you a policy, they will require you to undergo a basic medical screening. The younger you are and the better your overall health, the lower your premium will generally be.

There is a myriad of ways to calculate the dollar amount of life insurance you need. This amount can also change as your life changes. The simplest method to calculate the amount you need is to buy coverage that is equal to 5 to 10 times your gross annual income, including salary, bonuses, etc. More precise methods exist that take into consideration more specific information about your financial situation. The assets and liabilities you have already accumulated and the specific costs you wish to provide for in the future can be used to determine the proper amount of life insurance.

Life insurance will often serve as a valuable tool in your journey to meet your financial goals and objectives. Figuring out the right type and right amount of insurance is imperative in being able to provide for your family in the event of your death. As always, if you have questions about your specific situation, please do not hesitate to contact us.

Sources: Fidelity

*This article is provided for informational purposes only and should not be interpreted as investment advice.