By Joseph Destefano

Life insurance is, at its most basic, an insurance policy that pays a monetary benefit to a designated beneficiary upon the death of the insured party. Life insurance was originally intended to cover funeral expenses, but its role has expanded to provide economic security for surviving loved ones.

Do I Need Life Insurance?

To determine if you need life insurance, ask yourself whether your death would leave your family with financial problems. Would the loss of your income hurt your loved ones’ ability to live their current lifestyle? If you answered yes (and many people would), obtaining life insurance might be a good idea.  

How Much Life Insurance Do I Need?

An individual with school-age children and a dependent parent may need more coverage than an empty-nest couple with a paid mortgage and no debt. But what if a medical emergency occurs, or an accident? Life is full of unexpected things, and some of them are financially draining. Many companies offer worksheets to help you calculate the amount of coverage you may require based on your current situation. Bear in mind that situations can change. Speaking with a local insurance agency about the pros and cons of each type of plan, as well as to discuss your personal situation in more detail, may help you find a better plan.

Key Benefits to Look For:

When shopping for a life insurance policy, you may want to look for coverage such as:

• Funeral costs
• Mortgages payments, rent, or college tuition
• Income for dependents
• Medical bills and credit card balances

Types of Life Insurance

Several types of life insurance policies exist including:

Term Life Insurance—This type of life insurance pays benefits if the insured dies during a specified period of time. The term of the policy usually ranges anywhere from 1 year to 30 years but can be longer.

Term Life Benefits

• Low initial cost
• Can be used to cover short-term responsibilities such as college tuition and mortgages
• May be converted to whole life insurance (see below)
• Benefits are generally tax-free

Term Life Drawbacks

• Premiums increase with age to the point they may become unaffordable
• When the term of the policy expires coverage ceases and the policy has no further value
• Because there is no cash value there are no tax-deferred benefits

Whole Life Insurance—This type of life insurance provides coverage for the lifetime of the insured as long as premiums are paid. Whole life also provides a tax- deferred cash buildup that can be claimed by surrendering the policy.

Whole Life Benefits

• Premiums do not increase over time
• Policy builds cash value that can be drawn against or borrowed against
• Dividends can be paid directly to you or used to increase the value of the policy
• Cash value grows at a guaranteed minimum rate
• You can claim the accumulated cash value if you cancel the policy, although it may be taxable
• Serves as an enforced-savings plan

Whole Life Drawbacks

• Premiums are initially higher than term life
• No conversion option
• Loans and withdrawals significantly decrease the death benefit
• Dividends are based on fluctuating market factors
• Most policies do not build up a significant cash value for the first 12 to 15 years
• Rarely provides as high a dividend as available through other financial instruments

The Next Step

First, determine the financial needs of your loved ones. This includes adding up basic costs, such as groceries, toiletries, daily living needs, medications and health insurance, mortgage, rent, house repairs, furniture, new cars or other large expenses, college education, debt, and more. 

Next, determine your family’s goals, such as a retirement plan, investments, vacations, and more. Figure out how much money could realistically be set aside for these types of expenses.

After you’ve worked on your needs and your goals, consider the specific policies and benefit coverage for various life insurance companies. Be sure to take the premium amount into consideration and make sure you can afford it now, and in 10 years from now.

Obtain a worksheet from an insurance company and start crunching some numbers. Those policy premiums will jump depending on where you live, your occupation, your age, and your health. Be sure to obtain several quotes. And remember, if one company is lower than all the others by 30 percent or so, you might start asking if it’s too good to be true.  

One last note: Life Insurance can’t provide for every possible contingency, but it may give you an additional peace of mind that your family has some help in the event of your death.