Life Insurance: The Basics
Why would you need life insurance?
The most common reason for buying life insurance is to replace the income lost when you die. For example, say that you work, and your income is used to support yourself and your family. When you die, and your paychecks stop, the life insurance proceeds can be used to continue to support the family members you’ve left behind.
Another common use of life insurance proceeds is to pay off any debts you leave behind. For example, mortgages, car loans, medical bills, and credit card debts are often left unpaid when someone dies. These obligations must be paid from the assets left behind. This can deplete the resources that your family needs. Life insurance can be used to pay off these debts, leaving your other assets intact for your family to use.
Life insurance provides liquidity to your estate. When you die, you may leave some liquid assets (such as cash, CDs, and savings bonds), and some illiquid assets (such as real estate, an automobile, and stocks). Your liquid assets may not be enough to pay all the debts that you leave behind, plus all the expenses that arise because of your death (such as funeral expenses and estate taxes). Your illiquid assets may have to be sold in order to meet these obligations when they come due. This may cause a financial loss if the assets must be sold cheaply in order to get the money on time. Life insurance can avert this situation, because the proceeds are available almost immediately upon your death.
Life insurance creates an estate for your heirs. After your debts and expenses are paid, there may not be much left over for your family. Life insurance can automatically provide assets for them after your death. Life insurance is also a great way to give to charity when you die. You may have always had a great philanthropic desire, but not the means to make it a reality. Life insurance can do that for you.
Life insurance can even be a key element for specialized business applications, such as funding a buy-sell agreement. Under a buy-sell agreement, life insurance can be used to provide cash for the purchase of a deceased owner’s interest in the business. Finally, life insurance can be an investment vehicle. Some types of life insurance policies may actually make money for you, as well as provide the benefits described above. This can help you with long-term financial goals and strategies. What do you need to know about life insurance?
There are several kinds of policies that may be available to you. Term life insurance policies provide life insurance protection for a specific period of time or term. If you die during the coverage period, the beneficiary named in your policy receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. Common term policies last for 10, 15, 20 and even 30 years. Permanent insurance policies provide insurance protection for your entire life as long as the policy remains in force. In addition to the insurance protection provided, this type of policy also builds internal cash values, often described as a savings account within the policy.