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Definition of life insurance |
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Life insurance is a legal contract binding a life insurance company to pay a specific sum of money to a designated beneficiary upon the death of the insured. The goal of life insurance is to provide a measure of financial security for your family after you die. |
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Why do I need life insurance? |
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There are many reasons to own life insurance. The funds can be used to: replace income to maintain the family’s standard of living after the death of the wage earner; pay off the mortgage and any other debts; provide funds for to educate the children; and provide funds for the funeral and family emergency funds. Life insurance is also useful for estate planning purposes. |
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How much insurance do I need?
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There is no easy answer to this question. You will need to consider which of the following factors are important to you. Just ask yourself these questions:
- Do you want to cover your final expenses?
- Do you want to replace your income so your family maintains the standard of living they are used to while you were alive?
- Do you want to pay off the mortgage so your family continues to live in your home? Are their any other debts you want to pay off?
- Do you want to provide for your children’s education fund if anything were to happen to you?
- Do you want to provide an adequate fund to ensure your spouse retires comfortably?
Most financial advisors will tell you that you need at least 8 to 15 times your annual income in life insurance, depending on your age and number of children you have. Do you have enough coverage?
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Should I buy term or permanent insurance? |
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Before determining which product is right for you, consider some of the characteristics of term life and permanent life insurance.
Term life:
- Temporary insurance protection
- Low cost
- No cash value
- Usually renewable
- Sometimes convertible to permanent life insurance
Permanent life:
- Permanent insurance protection
- More expensive to own
- Builds cash value
- Loans are permitted against the policy
- Favorable tax treatment of policy earnings
- Level premiums
In most cases, term life insurance is the preferred product for your life insurance needs. Term insurance premiums have the advantage of being much more affordable. You can protect your family at a price that will fit your budget. Your need for life insurance may also decline as you get older. Your children will have graduated college and you have more savings in your retirement account and you owe less on your mortgage. However, there are instances where permanent protection is necessary. You may need it for estate planning purposes or if you have a disabled child that you wish to provide some assets after your death.
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