Are You Truly Covered by insurance policies

As the saying goes the only two sure things in life, are death and taxes.  Just as, people can take steps to limit their tax liability, they can also have a way to provide for their family after their death.  One of the easiest and most affordable ways to prepare for one’s family are by purchasing enough life insurance coverage.

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Types of Life Insurance

There are two basic types of life insurance:  term life and whole life.  Term life insures a person for a set number of years, from one to thirty.  Term policies offer more coverage for less money since the policy is strictly life coverage.  Life insurance premium is low for those under fifty years of age.  Since these are usually high face value policies, a medical examination is usually required.  These are performed by a nurse, and the price is covered with the insurance carrier.  Fees are generally low or absent with these policies.

By contrast, whole life insurance is designed to protect the “whole life” of the insured.  It is a term policy with an investment component, generally a money market fund.  A portion of the life insurance premium goes towards the face amount of the policy while the remainder is invested.  The investment portion is called the “cash value” of the policy.  To reap any benefit from whole life policy, the policy must be held for a minimum of twelve years to accumulate any cash value.  

Once there is cash value, it can be borrowed from the policy at a comparatively lower rate.  For those over sixty, whole life is generally the only option since term life insurance premium is age-rated.  It is worthwhile to note that upon the death of the insured only the face value is paid to the beneficiary.  The cash value remains with the insurance company.  There are many fees associated with these policies due to the investment portion of the policy.

Choosing a Life Insurance Company

Financial stability should be one of the main factors when choosing a company.  A.M. Best and Standard and Poor’s rate insurance companies on their financial stability and claims paying ability. A company should have an “A” category or better.  Make sure to look at ratings and quotes online.

How Much Coverage Do I Need

The amount of life insurance needed depends upon each family’s unique situation.  Are there single breadwinner or do both spouses work?  Is this a single parent household?  How old are your children?  The amount of coverage should be enough to replace the income of the deceased, cover funeral and medical expenses, and pay for any other expenses deemed necessary, such as school tuition or mortgage payments. 

 If both spouses work, each one will need to look at their contribution to the family budget.  Do not overlook a stay-at-home spouse.  Their contribution to the family, while not income-generating, does add significant value to the family.  Visit smart money to find a worksheet to help individuals choose their insurance needs.

Naming a Beneficiary

A beneficiary is a person who receives the benefit of the life insurance policy upon the death of the insured.  Generally, the beneficiary is the spouse or children of the insured, but some policies are written to pay the proceeds to the estate.  Life insurance agents or financial planners can assist individuals in their choice of beneficiary.

No one wants to contemplate their death, but failing to make any plans can put unnecessary strain on a family that is already under the stress of dealing with the death of a loved one. Take simple steps today, and create your tomorrow.

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Katherine Hedburg is a financial blogger and writes for kanetix.ca.