Life Insurance Introduction

What is life insurance?

Life insurance is a contract binding a life insurance company to compensate a beneficiary for the death of a person insured. If the insured dies the company will provide a cash payment to the beneficiary. Life insurance is used to protect the economic value of a human life with regards to those who may be financially dependent upon it.

Uses of life insurance

• Life insurance has many uses for both individuals and businesses. Some common uses include:

Individual Uses

• Funeral - Life insurance proceeds can ensure that there is enough money for proper funeral and burial expenses.
   
• Debt - Personal bills, credit card debt, student loans, and personal notes can be covered by life insurance in the event of an individual's death.
   
• Mortgage Protection - The proceeds of a life insurance policy can pay off the balance of a mortgage or provide an income stream to pay monthly mortgage or rent payments.
   
• Income Replacement - In the event of an individual's death, life insurance proceeds can provide a supplemental income stream to ensure that the surviving family members are able to maintain the same standard of living.
   
• Education - Life insurance proceeds can ensure that the education costs of the insured's children are covered.
   
• Taxes - Federal estate and state inheritance taxes can be pre-funded using life insurance to preserve the value of an estate.
   
• Donations/Gifts - An individual can use a life insurance policy to fund a donation to a charity or leave a gift to a family member.

Business Uses

• Key-Person - A life insurance policy can be used to protect a business from the loss of income and profits caused by the death of a key employee. For more information go to Key-Person Insurance in the advanced life section.
   
• Business Continuation - Life insurance can be used to fund a buy/sell agreement or stock redemption plan to determine enable a partner or group of employees to buy the business interest of a deceased partner.
   
• Business Loans - Life insurance protection on a key employee or business owner can be used to pay off the debts of a business in the event of that individual's death.
   
• Employee Benefits - Life insurance protection for employees is commonly included in company employee benefits plans.

Determining your needs

There is no magic formula to determine how much life insurance you should have; however, there are a number of factors that should be considered when estimating how much life insurance you should carry. They include:

• Final Expenses - These could be unpaid hospital bills, funeral expenses, unpaid debts, probate costs, and estate and inheritance taxes.
   
• Readjustment Fund - This may be used to cushion the immediate lifestyle adjustment that a family must make when a loved one dies. The family may be forced to move, or the surviving spouse might have to look for a new job. In addition, a working spouse may find it difficult to return to work immediately after the death of a partner. The readjustment fund allows for adequate bereavement due to loss.
   
• Supplemental Income - After the readjustment period, there should be a consistent income stream to help pay for the family's living expenses, such as mortgage payments, monthly bills, and daycare.
   
• Educational Funds - Adequate funds should be available for the children's' education. This might include elementary school, high school, and college.
   
• Retirement Fund - There should also be adequate funds available to ensure that the spouse can retire comfortably.

Road of Life Events

Your insurance needs change throughout your lifetime. The following major life milestones are a good time to reassess your life insurance needs to be sure that your loved ones are sufficiently protected.

These are some factors that you should consider carefully when estimating how much life insurance you need. Everyone's life insurance needs are different but, in general, an individual's needs are greatest from the time they start their careers or a family until they reach retirement, at which time many individuals' needs for life insurance diminish. It is important to remember that you should review your life insurance needs annually to account for changes in your family's lifestyle.