The Basics of Life Insurance

What Is Life Insurance?
Life insurance offers a way to replace the loss of income that occurs when someone dies (usually the person who produces the majority of income in a family situation). It is a contract between you as the insured person and the company or "carrier" that is providing the insurance. If you die while the contract is in force, the insurance company pays a specified sum of money free of income tax — "cash benefits" — to the person or persons you name as beneficiaries.

A good life insurance program does more than just replace the loss of income that occurs if you die. It should also provide money to cover the new costs that arise after your death — funeral expenses, taxes, probate costs, the need for housekeepers and child care, and so on. And these cash benefits should provide for your family's future needs as well, including college education for your children and part or all of your spouse's retirement needs. In almost all cases, your beneficiary can use the cash benefits in the way he or she sees fit, without restriction.

Some types of life insurance — permanent life insurance policies — have a cash value that you can obtain by cashing out the policy or by borrowing against it. Though it can seem attractive, most financial experts agree that this feature should be seen as a secondary purpose of life insurance. Another type of insurance is term life insurance policies are available as well. To learn more click the respected link.

Do You Really Need Life Insurance?

If there is someone who would suffer economic hardship if you died, then the answer is yes... you need life insurance! Families with young children have a clear need for life insurance. If both spouses work, the loss of one income will cause the family immediate economic hardship and make it harder for them to realize future goals, such as paying for the children's' education. But even if one spouse works "inside the home" and doesn't bring in a formal income, his or her death will require the surviving spouse to hire child care, housekeepers and other professionals to help run the household - and that can be a significant new expense.

If you are married without children or single, then you may need life insurance to protect your partner or surviving family members against the costs associated with your death. Funeral expenses, probate and administrative fees, outstanding debts, special obligations to charities, and federal and state taxes are costs that all of us must consider. And, they can add up quickly. Unless you already have sufficient financial resources, your survivors will probably need life insurance to cover these expenses.

What Happens To Your Family If You Don't Have Enough Coverage?

Under any circumstances, the loss of a loved one is a traumatic experience. But, if your family is also left without sufficient money to meet basic living needs or prepare for future goals, they will have to cope with a financial crisis at the same time. Depending upon their current financial resources and ability to "get back on their feet" emotionally and financially, your family might be forced to move to a less desirable home or community, abandon education and career plans, reorder family priorities (such as the amount of time spent with the children) and, in general, cut back on the quality of life you have worked hard to achieve.

Your family might even be forced to go into debt simply to pay the expenses, like funeral costs, taxes, and medical bills, that result from your death. A moment's reflection will tell you that the lack of sufficient life insurance coverage when a loved one dies can have devastating consequences for a family...consequences that can last for years.

Universal Life Insurance

Universal life insurance offers many features of whole life insurance, but allows greater flexibility once the policy is in force. Like whole life insurance, universal life insurance is a permanent policy. It protects the policyholder until death—however long that may be. Also like whole life insurance, universal life insurance accrues cash value over time.

Unlike whole life insurance, universal life insurance breaks the death benefit and cash value accumulation into separate components. This allows the policy holder to make changes in the policy. For example, if the policyholder wants to increase the death benefit, he or she puts more of the premium money into the insurance account and less into the cash value account. The reverse is also true. The policyholder can decrease the death benefit and increase the cash value contribution. To reduce premiums, the policyholder can pay only the insurance portion.

Once the cash value has accumulated, the policyholder can withdraw the money. The money must be paid back, or else the death benefit will be decreased. Some people use the universal life insurance policy as a savings account to draw on as they get older. Others use the accumulating cash value to increase the death benefit so they have more to leave their loved ones. Universal life allows these choices and decisions to be made throughout your lifetime.