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Life Insurance Basics

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Many of us buy life insurance because we want to make sure that our loved ones, especially dependents, remain financially secure after we die. Income replacement is the No. 1 reason people buy life insurance.

Non-earning caregivers also have an important – and often overlooked – economic value that should be covered by life insurance.

Life insurance is also purchased by those interested in achieving specific business or estate-transfer goals.

There are many types of life insurance policies depending on your goals, and there are huge price differences among different companies offering identical coverage. Policies are available from hundreds of life insurance companies in the United States. Most financial planners recommend that each family income provider carry no less than 10 times their annual income in life insurance.

Here’s an orderly way to go about shopping for life insurance:

1) Assess your needed life insurance amount..
2) Decide on the most appropriate policy type for your goals.
3) Choose possible companies by setting high standards for financial stability ratings.
4) Shop until you find the best price.
5) Look at ways to get the best possible life insurance rate.
Life insurance is a long-term proposition, so you should pay particular attention, at time of purchase and throughout the life of the policy, to the financial stability ratings of your life insurance company. Ratings indicate a company’s ability to pay claims.

Assessing your life insurance needs

The first step in life insurance planning is to analyze your life insurance needs – meaning the economic needs of dependents left behind. A great way to determine your coverage needs is to use an online calculator like’s Life Insurance Needs Estimator Tool.

Before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your final medical bills and funeral costs? Would your family have to relocate or otherwise change their standard of living after losing your income? The assumption of immediate death is necessary to determine the current life insurance needs for a family or individual.

Add in the longer term financial needs of the remaining family members, such as: children’s expenses, income for the surviving spouse, mortgage and other debt payoffs, college education funds and an additional emergency fund.
Because life insurance needs change over time, your life insurance amount should be reevaluated periodically. We recommend a review at least once every five years or whenever you experience a major life event such as a change in income or assets, marriage, divorce, the birth or adoption of a child, or a major purchase such as a house or business.

In theory, you should have a declining need for life insurance as you age because fewer people remain dependent upon you for income support. Exceptions would be protecting a business entity or paying taxes on a large estate for heirs. If the purpose of buying life insurance is to pay estate taxes, then you’ll need permanent life insurance, which is in-force as long as you live and pay premiums.

Policy choices

Life insurance policies [] are divided into two main types:

Term life insurance, which provides only death protection without any side funds or “cash values” (offering the least expensive cost per $1,000 of death coverage purchased).
Permanent life insurance, which has “cash value” accounts in which a return-on-investment component becomes an often complex and expensive part of the policy (most expensive cost per $1,000 of coverage).

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