Life insurance is a contract between you (the insured) and a company (the insurer). At the most basic level, you agree to give money to the insurer (buy insurance) and then, when you pass, the company agrees to give money to your beneficiaries (death benefit/proceeds).
It is a legal document and it entails one major component: In the case of a person’s death, the insurance company will automatically provide a lump-sum or repeated amount of payments to the designated beneficiary. After the insured’s death the life insurance policy can help ensure the deceased person’s family and loved ones are spared from big financial crisis for some time.
There are many variations that can be built into this type of contract. For example, some insurance will pay out in case of a terminal illness, or make multiple payments over time. How much you pay for the insurance depends on several factors such as your age, when you began your insurance plan, the payout amount, and what type of plan you selected. If you are the sole income earner and have children, your goal may be to financially support or replace income for a certain length of time if you pass away before your dependents. Life insurance may also need to be purchased on a stay-at-home spouse/partner that is responsible for childcare or other necessary family maintenance.
Life insurance is classified on the basis of whom it insures.
There are two types:1—Single Life
Single life policy is the traditional form of life insurance policies.
The policy insures one individual and pays the proceeds upon the death of that person.2—Survivorship, also known as Second-to-Die
A Survivorship policy is a relatively new form of policy that only pays a death benefit when the last of two or more named insured’s die.
A Survivorship policy provides a low-outlay, cost-efficient source of cash to fund the estate tax liquidity needs at the death of both a husband and a wife.
You can buy insurance that provides both death benefit coverage and builds cash value or focuses on providing guaranteed death benefit coverage.
Helpful Hint for Life Insurance Review: Decide who must be insured based on when and for what purpose the beneficiary needs the insurance proceeds.
Before you buy life insurance, find out what type of insurance plan your employer provides. Employers and businesses often have contractual plans with a given insurance company, enabling employees to get affordable life insurance. If your company does offer life insurance, find out the type of policy and how the benefit is calculated. Most employer-sponsored plans provide a multiple of your annual income as coverage, but rarely provide the proper amount of life insurance necessary for an individual or family. In most cases, you would need to purchase additional life insurance on your own. Typically, employer-sponsored life insurance plans are group term policies that terminate when you leave the company. In some instances, you may be able to pay for the policy on your own, but the cost is usually higher and it is typically a good idea to explore your options.
- Would your family’s financial security be at risk if you pass away prematurely?
- How much money will your dependents need in order to live comfortably after you’re gone?
- What are your monthly expenses, including mortgage payments and utilities? Could your family afford to continue living in your home?
- How much debt would you be leaving behind (including any medical or estate expenses) that your family will need to be able to pay off ?
- Could your children’s college educations be paid for? Y/N
- How about any emergency expenses, such as an home repair?
- Will your family need assets to handle taxes on your estate?