The death benefit is income-tax free and can be used to cover funeral expenses, repay debt, provide education, pay estate taxes or any other expenses your survivors may incur.
Life insurance may also be used to help ensure that a family business will pass to your intended survivor. There are also benefits to certain types of life insurance plans during your lifetime.
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Frequently Asked Questions
How much life insurance should an individual own?
Important factors include:
Income sources (and amounts) other than salary/earnings
Whether or not the individual is married and, if so, what is the spouse's earning capacity
The number of individuals who are financially dependent on the insured
The amount of death benefits payable from Social Security and from an employer sponsored life insurance plan
Whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc.
It is recommended that a person's insurance advisor be contacted for a precise calculation of how much life insurance is needed.
What about purchasing life insurance on a spouse and on children?
Should term insurance or cash value life insurance be purchased?
It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered:
"How much life insurance should I buy?" and
"What type of life insurance policy should I buy?"
The question contained in (1) involves an "insurance" decision and the question contained in (2) requires a "financial" decision.
The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium.
If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the "financial" decision--which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
How does mortgage protection term insurance differ from other types of term life insurance?
Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?
Yes, the purchase of a new mortgage protection term insurance policy is usually not required by the lender. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured's death.
Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.