Life insurance is an agreement between you and the insurance company. You pay the premiums, and the insurance company pays the proceeds to your beneficiary when you die.
If you are fortunate enough to have significant assets, or if nobody would be financially impacted by your death, you may not need life insurance. But that’s the exception to the rule.
For example, consider a young, dual-income couple with children. It takes both paychecks to make ends meet. If one of them dies unexpectedly, the surviving spouse can’t cover the mortgage, child care, and car payment. Life insurance is essential for this family – and for most.
Life insurance can be obtained through individual policies or a group plan provided by your employer. There are wide variations of plans available. The right plan depends on your particular financial situation. Some policies allow flexibility in the coverage amounts and premiums, allowing them to change as your financial circumstances evolve.
Risk insurance is a general term used to describe all types of insurance – from life to auto to homeowners. By definition, risk must be transferred for a contract to be considered insurance. The insurance company is taking a risk you will die soon after the policy is issued. They might receive a few dollars in premium and pay out thousands of dollars on the claim.
When purchasing an individual policy, choose an agent who is trustworthy, knowledgable, and has your best interest in mind – not just his or her commission. There are two basic types of agents:
1. Direct writers are employees of a particular insurance company and only sell their products.
2. Independent agents represent and sell the products of multiple insurance companies.
Direct writers are familiar with the set of products offered by their employer. Independent agents may not have the same day-to-day relationship with one company, but they can offer a wider array of products from different companies.
Insurance is a dynamic product, so it’s important to select an agent who keeps up with the changes. Look for credentials such as CLU (Chartered Life Underwriter) and CIC (Certified Insurance Counselor.)
Life insurance premiums are not tax deductible unless the beneficiary is a charitable organization. The good news is the proceeds are not subject to taxes. So, if you are covered for $100,000 and have named your wife as beneficiary, she will receive $100,000 that Uncle Sam cannot touch.
Life insurance policies are sometimes given as a gift to charities or other non-profit organizations. The organization is named as the irrevocable beneficiary and receives the proceeds upon death. It’s a convenient way to make a substantial future donation, and enjoy tax advantages.
You can name your grandchild as the beneficiary, but minor children cannot receive insurance proceeds until the age of majority. It is wise to establish a trust, and state the terms under which the proceeds can be used and distributed. That way, your wishes are carried out.