Life Insurance: An Important Estate Planning Tool
Many people put off buying life insurance for the same reasons they avoid writing their Will: because they believe it will be costly and difficult, that it is unnecessary, or simply to avoid thinking about their own death. But life insurance is a valuable estate planning tool for many people, and the process of buying it can be relatively straightforward.
Do I Need Life Insurance?
If you are single with no dependent children, you probably don't need life insurance. Similarly, if you are married with no dependent children and your surviving spouse would be able to pay expenses, there are probably better ways to invest your money. However, you should consider buying life insurance if you have dependent children, your spouse does not work, or if you own a business.
What Type of Insurance Should I Purchase?
Life insurance is typically divided into two major categories – term and permanent (aka cash value).
Term life insurance is the simplest and least expensive type of policy, typically costing just a few hundred dollars per year. This type of policy lasts for a set period of time (e.g. 20 or 30 years), and is a good option for people who want insurance until their children are grown or until they reach retirement.
Permanent or cash value life insurance is a more expensive option, both because its duration is typically longer (until the end of your life), and because it includes an investment component. With a cash value life insurance policy, money accumulated in a tax-free account can be used to pay future estate taxes. Also, beneficiaries are not required to pay income tax when they receive a payout from the policy. Although this type of plan can be beneficial for some people, it is important to weigh the costs and benefits. Investing additional money in a 401k can sometimes be a better option, allowing you to avoid the higher premiums and relatively limited investment options associated with a permanent life insurance policy.
How Much Coverage Do I Need?
The appropriate coverage amount depends on the length of the policy, your assets and expenses, and your current and projected income. You should also consider any special circumstances, such as the need to pay for a child's future college tuition or ongoing expenses for a special needs relative. Your broker or insurance company can help you plan your coverage amount and answer questions about your particular circumstances.
How Do I Buy Life Insurance?
Once you decide on the type and amount of coverage you need, purchasing life insurance is a relatively quick and simple process. You can purchase life insurance directly through an insurance company or use a broker if you're more comfortable doing so.
Life insurance may be purchased in person or online, and each has benefits. Shopping online allows you to research different types of plans and compare rates between companies. If you decide to work directly with a broker or specific company, someone will likely be available to explain your options and answer specific questions.
Also, some employers offer group life insurance plans. Group plans are beneficial for individuals with pre-existing medical conditions or health problems, because a medical evaluation typically is not required. In contrast, most individual plans require a basic medical evaluation. The insurer will usually arrange and pay for this evaluation.