Whether it’s for our cars, homes or health, most of us have some type of insurance. Many states require car insurance and most employers offer health insurance. You must carry home owners insurance if you own a home and many people that do not own a home buy renters insurance.
It is easy to understand why we need these types of insurance, however there is another type of insurance that is often overlooked: life insurance. Don’t overlook this important insurance safeguard. It pays money to your beneficiaries if you should die, which can save your dependents from years of financial misery. Read on to learn more about protecting your assets after your death.
How Life Insurance Works
How life insurance works is actually very simple. You make payments, called premiums, so that your loved ones will receive a sum of money upon your death. Assuming you are here because you are looking to purchase life insurance, there are a few things we want you to know first.
Functions of Life Insurance
Even though there are many types of policies out there to consider, these policies mainly fall into three categories or functions. You will need to decide which category fits your needs to determine which policy is best for you. The three main functions of life insurance are estate conservation, protection, and long term savings. Each category has different costs, benefits, and sometimes alternatives.
Most people buy life insurance for the simple reason that they want to provide for loved ones in the event of their death. Typically, your estate covers final expenses, medical bills, and any existing debt you may owe. If any money is left over, it goes to your family, or whoever you specify in your will. If you have only a small estate or no estate, life insurance can cover funeral costs and help your loved ones get by without your income.
If you fall into this category, term life insurance may be the best type of insurance for you. This is a relatively simple plan. The policy will be active for a specific amount of time, or term. You will pay premiums during this term and the policy will only a pay a death benefit if the death is during the policy period.Term life insurance is the most affordable form of life insurance.
Many people view life insurance as a way to have long term savings. If long term savings is your goal a cash value plan is one you need to consider. With a cash value plan, your beneficiaries receive a payment upon your death based on the full amount of coverage, not the cash value of the plan. Unless you are very wealthy, there are better ways to save for your family. Many different long term investment plans yield better returns, such as 401K plans, CDs and Bonds.
Some people use life insurance as an estate planning tool as well. If you have a sizable estate to pass on, there are policies that will allow the beneficiaries to receive the benefits without having to pay inheritance tax, which can diminish a sizable amount of the estate.
Most people will fall into the “Basic Protection” function of life insurance, but everyone has different needs. Look at your situation, the assets you need to protect and the family that relies on your income. Once you have established your needs, don’t wait any longer. Every day you delay buying life insurance, your dependents are at risk.