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Why buy life insurance?
Many financial experts consider life insurance to be the
cornerstone of sound financial planning. It is generally a
cost-effective way to provide for your loved ones after you are
gone. It can be an important tool in the following ways:
1. Income replacement
For most people, their key economic asset is their ability to
earn a living. If you have dependents, then you need to consider
what would happen to them if they no longer have your income to
rely on. Proceeds from a life insurance policy can help
supplement retirement income. This can be especially useful if
the benefits of your surviving spouse or domestic partner will
be reduced after your death.
2. Pay outstanding debts and
long-term obligations
Consider life insurance so that your loved ones have the money
to offset burial costs, credit card debts and medical expenses
not covered by health insurance. In addition, life insurance can
be used to pay off the mortgage, supplement \retirement savings
and help pay college tuition.
3. Estate planning
The proceeds of a life insurance policy can be structured to pay
estate taxes so that your heirs will not have to liquidate other
assets.
4. Charitable contributions
If you have a favorite charity, you can designate some of the
proceeds from your life insurance to go to this organization.
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How much life insurance do
I need?
To decide how much life insurance to buy, you need to first
figure out what your goals are in purchasing this coverage. Ask
yourself the following:
- Do I want to spare my loved
ones funeral costs and outstanding debts?
- Am I concerned that my
spouse or domestic partner will not be able to continue to pay
off the mortgage if I die suddenly?
- Do I have dependents who
count on my income?
- Am I concerned about college
savings for my children or retirement savings for my spouse if
I die suddenly?
While all situations are
different, here are two scenarios to help you think through the
questions you should pose to your insurance professional:
Dependents
If you have children, a spouse who does not work outside the
home or aging parents who you financially support, you have
dependents. Alternatively, you may simply have a spouse or
domestic partner who would be unable to pay the mortgage without
your financial contribution. In either case, your loved ones
will no longer have your income to help them pay the bills and
maintain their lifestyle after you are gone. You will have to
purchase enough insurance to provide for their future, while
considering how much of your budget should be devoted to life
insurance.
Some insurance experts suggest that you purchase five to eight
times your current income. While this may be a good way to begin
estimating your family's needs, you will also need to figure how
much your dependents will need to pay for some or all the
following:
- Cost of owning a home
(mortgage, maintenance, insurance, taxes and utilities)
- College savings
- Food, clothing, utilities
- Child care
- Nursing home or elder care
- Retirement savings
- Funeral expenses and estate
taxes
Your family may also need extra
money to make some changes after you die. They may want to
relocate or your spouse may need to go back to school to be in a
better position to help support the family.
No dependents
If you are young and plan to have a family in the future, you
may also want to consider purchasing life insurance now so that
you can lock in a good rate.
Just because you don't have dependents, does not mean you don't
have responsibilities. For instance, you may be concerned with
not being an economic burden to others if you die unexpectedly.
You may also want to leave some money behind to close family,
friends or a special charity as a remembrance. In this case, you
should purchase enough coverage to pay funeral and burial
expenses, outstanding debts and tax liabilities, so that the
bulk of your estate goes to your family, friends or charities.
Your insurance needs will vary greatly according to your
financial assets and liabilities, income potential and level of
expenses.
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Are there different types
of life insurance?
While there a many different types of life insurance policies,
they generally fall into two categories – term and permanent.
Term
Term Insurance is the simplest form of life insurance. It
provides financial protection for a specific time, usually from
one to 30 years. These policies are relatively inexpensive and
are well suited for goals, such as insurance protection during
the child-raising years or while paying off a mortgage. They
provide a death benefit, but do not offer cash savings.
Purchasing term insurance is like renting a home. It is a
short-term solution. Monthly costs are usually lower, but you
will not be building equity. Just as many people rent (while
saving to buy a home), individuals who need insurance protection
now, but have limited resources, may purchase term coverage and
then switch to permanent protection. Others may view term
insurance as a cost-effective way to protect their family and
still have money to put into other investments.
Permanent
Permanent insurance (such as universal life, variable universal
life and whole life) provides long-term financial protection.
These policies include both a death benefit and, in some cases,
cash savings. Because of the savings element, premiums tend to
be higher. This type of insurance is good for long-range
financial goals.
Purchasing permanent insurance is like buying a home instead of
renting. You are taking care of long-term housing needs with a
long-term solution. Your monthly costs may be higher than if you
rent, but your payments will build equity over time. If you
purchase permanent insurance, your premiums will pay a death
benefit and may also build cash value that can be accessed in
the future.
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What is a beneficiary?
A beneficiary is the person or financial institution, (a trust
fund, for instance) you name in a life insurance policy to
receive the proceeds. In addition to naming a specific
beneficiary, you should name a second or "contingent"
beneficiary, in case you outlive the first beneficiary.
If there is no living beneficiary, the proceeds will go to your
estate. If there are probate proceedings this could possible
delay your loved ones receiving the money. The proceeds may also
be subject to estate taxes.
Picking a beneficiary, and keeping that choice up-to-date, are
important parts of purchasing life insurance. The birth or
adoption of a child, marriage or divorce can affect your initial
choice of who will receive the death benefit when you die.
Review your beneficiary designation as new situations arise to
make sure your choice is still appropriate.
Pay special attention to the wording of your beneficiary
designations to ensure that the right person receives the
proceeds of your estate. If you write "wife/husband of the
insured" without using a specific name, an ex-spouse could
receive the proceeds. On the other hand, if you have named
specific children, any later-born or adopted children will not
receive the proceeds - - unless the beneficiary designation is
changed.
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How often should I review
my policy?
You should review all of your insurance needs at least once a
year. If you have a major life change, you should contact your
Independent Insurance of Central Iowa agent. The change in your
life may have a significant impact on your insurance needs. Life
changes may include:
- Marriage or divorce
- A child or grandchild who is
born or adopted
- Significant changes in your
health or that of your spouse/domestic partner
- Taking on the financial
responsibility of an aging parent
- Purchasing a new home
- Refinancing your home
- Coming into an inheritance
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Insurance Information Institute
www.iii.org/individuals/life/ |
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