New and expecting parents often begin to think about financial security for their family's future. Life insurance offers financial protection and peace of mind, but there are so many options that it can be confusing. This article arms you with some basic information that can help you clarify why you need it and what it can and can’t do for you.
What Is Life Insurance?
Life insurance policies provide a monetary payout - also known as a death benefit - to a
designated “beneficiary” when an insured person dies. A beneficiary is the the person who is
named on the policy who will receive the death benefit when an insured person dies.
For example, if you purchase a $250,000 life insurance policy for yourself, you are the “insured person” and you name your spouse as your beneficiary. If you die, and your policy is in force (meaning that your policy is in good standing) your spouse will receive a
payment of $250,000. That payment can be used for anything your spouse may need. In many cases, the payout is used to pay off a home loan or other debt, to fund education costs or even maintain the family's current standard of living.
How Much Life Insurance Will I Need?
Your life insurance agent can help you determine how much life insurance you may need given your family’s unique lifestyle and financial circumstances. Life insurance isn’t only for those who are rich and looking to minimize risk to their financial security - in fact, those who may benefit most from life insurance are those who may have debt, are just beginning to build savings or haven’t started yet, and families who live off one primary income.
Generally, you’ll want to think about what would happen if you die and how many years of income you may want to replace. Then add up any debt you’d want to pay off (mortgage, credit cards, student loans or car loans) and any future education costs for your children. Also add in general lifestyle costs if you’d like your family to maintain their current standard of living. That’s probably a good starting number that you can discuss with your life insurance agent.
He or she can help you determine how much life insurance you may need and also help you find a policy that fits into your budget. An independent life insurance agent works with several life insurers and can help find you several policies that may fit your family’s unique needs.
Types of Life Insurance: Term and Permanent
There are many types of life insurance policies, however, most fit into one of two categories: term or permanent.
Term life insurance is the most budget-friendly type of life insurance that you can get. It is very
inexpensive and covers you and your family for a "term," or a set period of time. If you die during
the coverage term, your life insurance policy pays the death benefit to your designated
beneficiary. If you are still alive when the policy expires--congratulations! You’ve outlived your policy. However, your policy pays nothing. You will need to renew your policy or get another. Many employers offer term life insurance to their employees for free or at a low cost and usually for the same amount of the employee’s annual salary. If you leave the company, your term insurance ends.
The biggest advantage of term life insurance is that you can get a lot of coverage for a very small amount of money, which is often a good option for growing families who are often paying off debts and working to build financial security for the future. Term life won't break the bank but offers a lot of protection, particularly for those who are just getting started. The drawback is that it does expire, so If you decide to get term insurance, be sure you know how long your term will be and whether it can be renewed or converted into a permanent policy after the term expires.
Many growing families purchase term insurance for terms between 10, 15 or 20 years, with the assumption that when the term expires, they will no longer need life insurance because their family is grown, their house is paid off and the savings and investment accounts are in good shape.
Permanent life insurance lasts your entire life rather than a set “term.” Like term insurance, it pays a death benefit to your beneficiary when you die. There are many types of permanent life insurance: Whole Life, Universal Life, Variable Universal Life, and Indexed Universal Life. Each has its own unique benefits and drawbacks, and your life insurance agent can help you determine which type may work best for your needs and goals.
Permanent life insurance almost always involves a tax-deferred cash value that gradually
increases over time. Depending on the terms of your policy, after the cash value has matured, you can borrow against it, use it to pay your premiums or to buy additional insurance, or even cash it in for a fee, though cashing in your policy would cancel it (thus leaving your beneficiary no money) and there are usually steep penalties for doing so.
Permanent life insurance is a good option for those who may have a lifelong dependent (like a special needs child who will need care long after you are gone), those who are interested in growing the cash payout over time or would like the flexibility of borrowing against the payout if needed in the future. Permanent life insurance is also a good idea for families who have significant assets and want to use the payout to help defray estate taxes. In fact, permanent life insurance can be an excellent estate planning tool, as there are so many types of policies that your life insurance agent (especially an independent life insurance agent) may be able to find you a plan that is as unique as you are and will provide security and peace of mind for your family.
An independent insurance agent will take you through the whole process, answer all of your questions along the way and guide you through your options for choosing the right type of policy that best fits your needs and your budget.
Get in touch with your local Give Your Kid A Million agency partner today to find out how easy it is to make sure your family's future is secure.