Life insurance is often purchased for one or more of the following reasons:
1) Pay Final Expenses. Life insurance can be used to pay for funeral and burial expenses, probate and other administrative costs, other debt and final medical expenses that may not be covered by health insurance.
2) Replace Income for Dependents. Life insurance benefits can be used by surviving spouses, children, and other dependents that had relied on the income you provided that is no longer available due to your untimely death.
3) Create an Inheritance for Your Heirs. Life insurance can provide the sole or additional funds to named beneficiaries.
4) Pay Estate Taxes. The Federal Government and many State Governments charge Estate taxes on the assets of someone when they become deceased. Life insurance can be used to pay estate taxes so that beneficiaries of the Estate don’t have to liquidate assets or take a smaller inheritance.
5) Fund Charitable Contributions. Life insurance can be used to provide charitable organizations with more funds than you might otherwise be able to provide if you were to solely donate cash or other assets that you had saved up.
6) Create a Source of Savings. Some kinds of life insurance policies build a cash value that can be borrowed or withdrawn on the owner’s request. If the cash value is left untouched, the policies can accumulate funds that grow on a tax-deferred basis (and tax exempt if the money that grows is paid as a death claim).
Things to consider when determining How Much Life Insurance to Purchase:
1) Determine how much you would like to leave in charitable contributions and how much of an inheritance you may wish to leave to beneficiaries.
2) Purchase enough life insurance to offset lost income that would otherwise be generated for dependents , fund additional expenses they will incur to replace services you provide, and fund expenses for things such as moving costs and educational expenses that may occur as a result of your death
3) Provide for loss of “hidden income.” This includes loss of employer medical insurance, employer matching contributions to 401(k) plans and other perks that would disappear as a result of an employed individual’s unexpected death.
4) Ensure that there are enough funds to pay for final expenses like funeral costs, estate taxes and estate administrative costs.
When making these determinations, it is important to take into consideration different sources of post-death income besides life insurance. Social Security Survivors’ Benefits provide funds for minor children under the age of 18 and the surviving spouse caring for them until all minors reach the age of 18. Also, it is possible that an individual may have some life insurance provided through an employer, fraternal organization of affiliation, or through other institutions such as banks, credit card companies, etc.
Types of Life Insurance
Term Life Insurance: provides coverage for an individual for a certain term or period of time. The policy would only pay if a death occurred during the term of the policy, which commonly run from one to 30 years.
Whole Life Insurance: a type of permanent life insurance that features guaranteed premiums, death benefits and cash value. Some policies also have the potential to pay dividends that can increase the value of the policy.
Universal Life Insurance: type of flexible permanent life insurance that offers low-cost protection of term life as well as savings element (like whole life insurance) which is invested to provide a cash value buildup. The death benefit, savings and premium can be reviewed and adjusted as policyholder’s circumstances change. Universal life allows policyholder to use interest from accumulated savings to help pay premiums.