The Basics of Life Insurance

Life insurance is an agreement between you (policy owner/insured) and an insurance company (insurer). In exchange for premium payments, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon the insured’s death. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die. Life Insurance proceeds are typically income tax-free to the beneficiary.

What Needs Can Life Insurance Fulfill?

When an individual dies, life insurance provides immediate cash to satisfy needs created as a result of the insured’s death, and it can continue to provide for survivors’ needs for years to come. Life insurance can pay final expenses such as medical and funeral bills, estate administration costs and taxes. It can also pay off a mortgage, retire outstanding consumer debts, establish emergency funds and provide education funds. Life insurance can also help replace a wage earner’s income by providing ongoing income to pay day-to-day living expenses including food, clothing, transportation, school expenses, medical checkups, entertainment, gifts and incidentals. If the mortgage isn’t paid off, the proceeds can also be used for monthly mortgage or rent payments. The amount needed can vary depending on an individual’s income level, lifestyle and personal preferences.

How Do I Determine How Much Life Insurance I Need?

The human value life approach is a method often used for determining life insurance needs. It takes into consideration the lifetime monetary value of a person’s future earnings projected through retirement. Once determined, you can decide how much of the wage earner’s income should be replaced. Surviving family members may not need to replace 100% of the prior income, 65% to 75% may be sufficient to maintain their standard of living. Adjustments can then be made to the income needs by deducting other available income sources. Once you have considered these factors and made any adjustments, the next step is to determine the number of years survivors will need the income. Income needs may be less when children become self-supporting or a surviving spouse’s earnings increase. Finally, other adjustments can be made based on other life insurance already in force, and other savings and investments available to the survivors. Finding the answer to how much life insurance you need begins with a careful, detailed examination of current and future needs. It’s an important first step in keeping lifetime responsibilities and goals intact.

Types of Life Insurance

The are two basic types of Life Insurance products, Term Life Insurance and Permanent Life Insurance.

Term Life Insurance provides a death benefit for a specific term period, typically 10, 15, 20 or 30 years. During this term the premium is guaranteed not to increase. After the term period is over the policy will end or in some circumstances, the premium will increase. Term Life Insurance typically costs less than Permanent Life Insurance because the insurer knows that they have an obligation to provide a benefit for a specific amount of time versus the insured’s lifetime. If the insured determines that they would like to extend the life insurance as it gets closer to end of the term period, evidence of insurability may be required to obtain new life insurance.

Permanent Life Insurance provides a death benefit for the life of the insured. Unlike Term Life Insurance, Permanent Life Insurance can be kept in force for the life of the insured without having to show evidence of insurability in the future. There are many types of permanent life insurance products and depending on the insured’s need (death benefit only, tax-deferred accumulation, Long Term Care needs, etc.), some permanent products will be more appropriate than others.

How Much Does Life Insurance Cost?

The cost for life insurance is determined by the type and amount of life insurance being considered, the age of the insured and the health of the insured. Typically, the younger and healthier you are the less expensive the life insurance policy will be.

Process for Applying for Life Insurance

Once the amount of life insurance and type of product is determined, the insured will complete an insurance application to submit to the insurer. Depending on the age of the insured and the amount of life insurance being applied for, the insured may have to do an insurance exam. In some cases, the carrier may need to get medical records from the insured’s doctor(s).

With the above information, the insurance carrier will underwrite the application and provide a life insurance policy. In some cases, the carrier may decline to make an offer or may increase the cost of the policy depending on the health of the insured.

New Canaan Group is happy to help you with your life insurance needs and get you the coverage you need. Please reach out to us if you would like to talk to our life insurance specialist to determine what makes sense for your particular situation.

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