Life insurance is something that many parents consider buying as protection for their families in the event of unexpected death. Though most people have a general idea of what life insurance is, the specifics of how life insurance works may be a surprise. If you are considering buying life insurance, do the research to understand what you're getting.
The Facts
Like all insurance, life insurance provides a specific financial payment in the event of emergency in exchange for your monthly or annual premium payments. With life insurance, the emergency event is your death, or the death of the policy holder, and the benefits get paid to your chosen beneficiary.
Types
There are two basic types of life insurance, according to the American Council of Life Insurers. Permanent life insurance is effective for the entirety of your life; as long as you pay your premiums, your insurance is effective. Because it's long-term insurance, the value of your policy grows over time, and you may be able to borrow money or secure a loan based on the growth of your policy. Term life insurance provides benefits for a set period of time. Your beneficiary only gets paid if you die during the specified time the policy is in effect.
Benefits
In the event of your death, a life insurance policy protects your family (or your business) from the financial hardship your death might cause. If you're the main breadwinner or caregiver for your family, replacing your contributions to your family could be expensive and difficult. Life insurance lets you estimate how long your family will need financial assistance, what financial assistance they will need and make sure they have access to that assistance after your death.
Considerations
To determine how much life insurance you need, add up the total income contribution you make to your family each year. Add to that the estimated cost of funeral and burial expenses, as well as costs for things like child care and moving expenses that might come up in the event of your death. Consider ongoing or upcoming expenses, such as tuition or mortgage payments. The American Council of Life Insurers encourages you to determine the benefits you need based on your particular situation but suggests benefits of seven to 10 times your annual income as a possible starting point in your considerations.
Expert Insight
The American Council of Life Insurers recommends re-evaluating your life insurance needs at life milestones, such as marriage, the birth of new baby or adoption, to make sure your coverage still fits your family. It also recommends not keeping your policy information in a safe deposit box, since in some states these boxes are sealed and inaccessible for a period of time after a person's death.
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