Life Insurance: The Basics

Like most other insurance products, life insurance is often overlooked until it's too late. Purchasing a life insurance policy can be one of the most important decisions you make to secure your financial future and that of your family. Before you can make such a decision it helps to know the basics of life insurance.

What is Life Insurance?

Life insurance is an insurance policy that pays out money in the event of a tragedy claiming your life, or that of a loved one. Life insurance can be arranged so that money is set aside to pay for personal bills, family and business expenses, fees related to funerals and even for things like the future education of your children, mortgage payments and for the retirement of a spouse.

Types of Life Insurance

Various life insurance carriers typically offer two basic types of life insurance:

• Permanent life insurance: This covers you for your entire life and pays benefits at the time of your death, whenever that may occur.
  
  
• Term life insurance: This covers you for a specified period of time, like 10 or 20 years, and pays out benefits if you die during the policy term.

Why Do I Need Life Insurance?

If someone depends on you financially, you need life insurance. Most Americans have accumulated some amount of debt. Without life insurance, your remaining family members may have to rely on other methods to settle those debts, including selling personal property, vehicles, or even your home. Wouldn't it make you feel comfortable to know that if you pass on, your dependents would still be taken care of financially? That's exactly what life insurance is for. In some cases, like extreme sickness or a debilitating illness, your death benefits can be accelerated and you can begin collecting your life insurance funds before you die.

How Does Life Insurance Work?

Life insurance is purchased as a policy; similar to your car insurance or home insurance. You can buy a policy directly from an insurance company or through an independent broker or agent.

Insurance payments are made on a set schedule: monthly, quarterly, or yearly. The amount you pay for the insurance is determined by how much coverage you want and how long you are expected to live. The younger you are, the cheaper your life insurance policy will be per month, as your life expectancy will usually be longer. For those who wait until their twilight years to obtain life insurance, they may see higher monthly premiums.

In all cases however, the amount of the policy is much higher than the amount you pay into it. For instance, $500,000 of coverage paid after your death may only cost $100 or less per month while you are alive. Each life insurance policy can be tailored to meet the needs of the individual and the life events they wish to insure.

Insurance for Every Life Event

Many people choose to add life insurance at the onset of a specific life event. Some of these milestones may include:

• Birth or adoption of a child
• College education funds
• Funeral expenses
• Loved one requiring long term care
• Marriage or divorce
• Purchase of new home
• Retirement funds for spouse.

By planning ahead with a life insurance policy, you can make sure your family has the financial ability to cover the expenses of these important life events and more.