If this is a question you have been asking consider the following:
Life insurance can offer peace of mind, creating a payout that would cover your debts and or your family members financially in the event of you should die.
Would my death create a financial crisis for anyone?
Life insurance is an important consideration for anyone concerned about how their death might financially impact loved ones. Once you have a significant other, you should have life insurance coverage in place. If you have significant financial obligations such as a mortgage, car loan, and credit debt. Your surviving dependant can use life insurance to ensure that the debt is covered.
Parents benefit greatly from having life insurance so that if they die while their children are still dependents, the children are left with funds to live off, pay off debts, and post-secondary education financial needs. Life insurance can be used to ensure that all debt is covered and a post-secondary education can still be obtained without financial burden placed on your children.
The amount of coverage that is needed is determined by using either a Present Needs, or Future Needs process.
What does Present Needs mean?
The present needs process is a way of determining the appropriate amount of life insurance coverage an individual should purchase. This approach is based on the creation of a budget of expenses that will be incurred upon death, including funeral expenses, estate settlement costs, and replacement of a portion of future income to sustain the spouse or dependants.
What does Future Needs mean?
The future needs process contrasts with the present needs as the future needs process calculates the amount of life insurance a family will need. Based on the financial loss the family would incur if the insured person were to pass away today. The future needs usually take into account factors such as the insured individual’s age, gender, planned retirement age, occupation, annual wage, and employment benefits, as well as the personal and financial information of the spouse and any dependent children.
When calculating any expenses, it is best to overestimate all needs a little. For instance, consider any outstanding debts and obligations that should be covered, such as a mortgage or car payments. Also recognize that the need for income replacement may gradually decline as children living at home move away.
What is Term Insurance?
Term insurance is pure insurance protection that pays a predetermined sum if the insured dies during a specified period of time. On the death of the insured person, term insurance pays the face value of the policy to the named beneficiary. All premiums paid are used to cover the cost of insurance protection.
The term may be 10, or 20 years. But unless it’s renewed, the insurance coverage ends when the term of the policy expires. Since this is temporary insurance coverage, it is the least expensive type to acquire.
Here are the main characteristics of term insurance:
- Temporary insurance protection
- Low cost
- No cash value
- Usually renewable
- Sometimes convertible to permanent life insurance
Term insurance pays a set amount if the insured passes away during a specific time period, and is considered to be “temporary” insurance, while permanent life insurance guarantees insurance for life, provided the premiums continue to be paid on time.
What is Permanent Life Insurance?
Permanent life insurance provides life time insurance protection (does not expire). Most permanent policies offer a savings or investment component combined with the insurance coverage. This component, in turn, causes premiums to be higher than those of term insurance. This savings portion of the policy allows the policy owner to build cash value within the policy which can be borrowed or distributed at some time in the future.
Here are the main characteristics of permanent life insurance:
- Permanent insurance protection
- More expensive to own
- Builds cash value
- Loans are permitted against the policy
- Favorable tax treatment of policy earnings
- Level premiums
The two most common are whole life and universal life. Whole life insurance provides lifetime protection—for which you pay a predetermined premium. Cash values usually have a minimum guaranteed rate of interest, the death benefit continues to grow allowing the cash value within the policy to grow tax exempt in the future.
Universal life insurance separates the investment and the death benefit portions. The investment choices available usually include some type of equity investments, which may make your cash value accumulate quicker but at the same time you are now more vulnerable against the markets in which you invest (because as the market fluctuate the value of cash fluctuates which is volatile risk). Over time, you can usually change your premiums and death benefits to suit your current budget.
Age, health, and whether or not the person seeking life insurance smokes all factor into the price of a policy.
@ Henley Financial and Wealth Management Inc. 