What is life insurance?
A life insurance policy states that you will pay premiums to an insurance company over time and, in return, the company will pay a lump sum to a designated beneficiary in the event of death. Life insurance policy money can help pay bills and help sustain the living expenses of surviving family members. It may be necessary to change the amount of the life insurance policy related to major life events, such as buying a home, marriage or having a child.
What are the different types of life insurance available?
Full life insurance policies (or universal)
Whole (or universal) life insurance policies are considered permanent. As long as you pay the premium, the policy is in effect. In addition to paying a death benefit, life insurance policies also have an investment or savings component. This means that you accumulate cash value over the life of the policy, so you can borrow money from these types of policies if necessary.
Term life insurance
Time-based life insurance policies are in effect for a certain period of time or term. If you have this type of policy and lose it during the period the policy is in effect, the insurance company will pay a benefit. If you live beyond the time the policy is in effect, the insurance company will not pay a benefit or refund you.
Term life insurance policies are generally less expensive than full life insurance policies. This is because term life insurance policies cover only a certain period of time, while full life insurance policies are meant to be permanent and because part of the money paid is set aside for savings.
Considerations for a life insurance policy
Most people buy life insurance to provide financial security to their families in the event of the insured's death. If this is your reason, the first step in calculating how much insurance to buy is to identify the likely financial needs of dependents. If you are married, in a civil union or have a significant other, you will need sufficient coverage to minimize the financial needs of your spouse or partner after you are gone. If you have dependent children, you may want to help pay college tuition and other expenses. If your annual living expenses like a mortgage on your home, personal or auto loans or property taxes are high enough, you will need more insurances than someone for whom the home mortgage was entirely paid.
Sufficient coverage may also be needed to ensure that dependents do not have to pay the final costs, such as hospital costs and burial costs.