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What You Should Know About Life Insurance:
The Basics
Become familiar with the basics of buying life insurance so you can make an informed decision.
This is especially important because life insurance salesmen and women often play on customers’ weaknesses. Life-insurance agents often aim at your emotions, fear of death, love of family, and the desire to make them “secure.”
Many life-insurance salesmen don’t bother to find out what other insurance companies offer, let alone know, or care, whether an entirely different type of investment might be better. (Please read my article “Sales People Must Sell” before you buy a policy.)
Why Buy Life Insurance?
Life insurance premiums buy future financial security for your family. Life insurance helps ensure that, when you die, your dependents will have the financial resources they need to protect their home and the income they need to run a household.
Life insurance can also be used to help with other financial goals such as funding retirement or education expenses. However, the main purpose of life insurance is financial protection.
If your primary goals are something other than financial protection, you should consider other financial products that are available to meet those goals.
Why Do I Need Life Insurance?
Life insurance is an essential part of financial planning. One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner.
The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die. Life insurance proceeds could mean your dependents won’t have to sell assets to pay outstanding bills or taxes.
An important feature of life insurance is that no income tax is payable on proceeds paid to beneficiaries.
How Much Life Insurance Do I Need?
When deciding how much life insurance you should have, think about different types of expenses. Consider:
- Outstanding debt including credit cards, mortgage, car loans, student loans, home equity loans
- Expenses such as monthly living expenses, food, medical expenses
- Estate taxes
- Cost of living, inflation
- Beneficiaries including spouse (employed or retired), children (day-care, college tuition) and other family members (siblings, parents)
Come at your financial situation from a different approach. Think about:
- Immediate needs at time of death such as expenses from a final illness, funeral and burial costs, estate taxes
- Funds for a readjustment period, to finance a move, or to provide time for family members to find a job
- Ongoing financial needs such as monthly bills and expenses, daycare costs, college tuition, retirement
One quick rule of thumb is to buy life insurance that is equal to five to seven times your annual gross income. However, there is no substitute for carefully evaluating the amount of coverage needed to meet your needs.