Life insurance protects those who depend on you financially. Whether or not you have life insurance could mean the difference in whether your loved ones are financially cared for after your passing.
How Does Life Insurance Work?
There are two basic types of life insurance.
Term life insurance is initially the most affordable because it is designed to meet temporary needs. This type of policy offers coverage for a set number of years (a “term”), anywhere from 1 to 30 years, and it generally pays a benefit only if death occurs during that term. A term life policy has no cash value, doesn’t accrue interest, and you can’t borrow against it.
Permanent life insurance provides lifelong protection as long as you are paying the premium.This type of policy typically costs more than a term life insurance policy, but it does accumulate cash value and you can borrow against it if needed. Premiums can be fixed or flexible. There are several types of permanent life insurance.
- Whole Life is the most basic permanent life insurance. It has a savings component that earns cash value, but you have no control over how or where the money is invested.
- Universal Life insurance allows you to shift funds between the insurance and savings components of the policy.
- Variable Life insurance gives you control over where your savings are invested (stocks, bonds, mutual funds, etc.). The rate of return on investments not only affects the cash value of the policy, but increases or decreases the amount of the final death benefit.
- Universal Variable Life combines the flexibility of universal life with the investment control of variable life. The amount of the final death benefit and cash value depend on the performance of investments.
Do You Need Life Insurance?
Most people believe they don’t need life insurance until they are married and have children. But in reality, if someone will suffer financially when you die, you need life insurance. Choosing the type and amount of life insurance you need will be determined by your current situation.
Consider the following scenarios:
Single: Because no one depends on you financially, you may not need life insurance or at least not a lot of life insurance. But there are exceptions. Are you providing financial support for aging parents or a sibling with special needs? Or do you have significant debt that you wouldn’t want to pass on to family members?
Married without kids: If one of you died tomorrow, would the surviving spouse have enough income to pay monthly expenses such as rent/mortgage, car loans, credit card balances, and utility bills?
Married with kids: Most families need two incomes just to make ends meet. If one of you died, could your family meet all of the financial obligations? Would your child’s college plans remain intact?
Single parent: Single parents have all the financial responsibility resting on their shoulders. If this is you, how are you going to safeguard your child’s future?
Stay-at-home parent: Just because you don’t earn a salary doesn’t mean you don’t make a financial contribution to your family. Childcare, transportation, cleaning, cooking, and other household activities are all important tasks, the replacement value of which is often severely underestimated.
Retired: Although you may no longer have many expenses and you may not be supporting anyone financially, the proceeds from a life insurance policy will help your loved ones take care of any taxes, funeral costs, or other debts you may leave behind.
Small business owner: Life insurance also helps protect your business. What would happen to your business if you or a co-owner died unexpectedly?
How Much Life Insurance Do You Need?
Life insurance is just one part of your financial plan, and it needs to fit into your budget. Determining how much life insurance you need depends on your specific situation.
First, figure out how much income you provide your family. This means subtracting taxes and personal expenses from your salary.
Next, figure out how long your income will need to be replaced. For example, if you need a policy that will cover your income for the next 20 years, multiply your income by 20. That’s the amount of coverage you need.
How to Collect Life Insurance Benefits
To collect on a life insurance policy, a surviving family member must fill out an official claim form from the life insurance company. A certified death certificate that states the date, location and cause of death will need to be provided. In some cases, an original copy of the insurance policy will be needed. When the insurance company approves the claim, it is settled with one lump sum payment to the person who is listed on the policy as the beneficiary.
Have you ever considered what might happen, or where you would live if you couldn’t manage taking care of yourself or your home any longer? What about your parents? Are you becoming concerned about their safety as they age? Are there multiple floors to manage, are they at risk of falling, is someone checking in on them, and do they have transportation? If any of these are concerns of yours, it might be time to consider relocating to communities designed for seniors.
In addition to having a plan, and the supplies and materials to keep you and your family safe, you should also consider the importance of being able to access important documents and information that may be critical following a disaster. Having access to personal financial, insurance, medical, and other records is crucial for starting the process of recovery quickly and efficiently. Experts suggest copying and storing this information in the cloud so it can be accessed quickly in the event of an emergency.
For me the ultimate act of love is planning ahead. I call it Death Etiquette™: Death Etiquette™ - Being thoughtfully prepared for one’s own passing. Accordingly, making things easier for family and loved ones by leaving clear and concise instructions in regard to your final wishes for funeral desires as well as location and access to important documents and accounts. Further identifying who should be responsible for carrying out the final wishes and ultimately settling all the final affairs. It is a simple act which saves loved ones Stress, Time and Money…. the things which divide families!
Let’s face it, life and our stuff, is significantly more complicated than it was 20 or 30 years ago. Technology has made it so. Technology, while simplifying our lives immensely, has made for a very complicated departure.