Life Insurance 101: Preparing for the Unfortunate

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A life insurance policy is something that every person needs. Sadly, many undervalue the worth of life insurance. Justifiably, facing ones own mortality is not a comfortable subject. Many people put off buying a policy because the issue of death or losing a loved one makes them anxious. Nevertheless, avoiding the topic may not always be the best move. Too many people die each year without a life insurance policy. A sizeable number of these individuals are young. Younger adults have a tendency to think that they are immune to premature death. Regrettably, their families are the ones who must suffer emotionally – and financially.

What is Life Insurance?
Mistakenly, many believe that their death will exempt them from financial obligations they had while living. Of course, there are disclaimers we can obtain for student loans and home loans that forgive a debt upon our death; however, the majority of lenders – especially credit card lenders – expect their money, regardless of whether a person is deceased. The purpose of life insurance is to cover all expenses belonging to the deceased individual. This may include repaying credit card debts, personal loans, student loans, and so forth. In addition, the money will also cover the cost of funeral and burial. Some employers offer small life insurance plans, however, many discover that this amount is usually only enough to cover funeral expenses. Along with repaying a loved one's financial obligations, life insurance policies are intended to supplement the individual's income, which allows their family to maintain their current standard of living.

How Much Life Insurance?
The amount of life insurance a person chooses is based on their individual circumstance. For example, a single adult with little debt may select a small policy to cover the cost of their funeral and repay small loans. Meanwhile, a family head with a mortgage, car loan, personal debt, and so forth may select a policy with a larger dollar amount to ensure that his or her family will be cared for. The money that the surviving family members receive may be used to replace the deceases income. Family heads, or anyone, who dies without life insurance inadvertently pass their financial responsibility to their family. Many debtors are insensitive to the grief that surviving family members are dealing with. There are cases when landlords and lenders have sued families in order to collect repayment. Having an adequate amount of life insurance will eliminate this problem. There is no such thing as too much life insurance. In fact, many family heads without a lot of personal debt have policies up to one million dollars. Policies of this nature are great for paying a surviving child's educational expenses, and providing family with a financial cushion. Of course, the price of life insurance varies depending on the amount of coverage, and the overall health of the policy holder.

When a policy holder dies, the money will be paid to the beneficiary, or beneficiaries, listed on the life insurance policy. A beneficiary may be anybody including a spouse, child, parent, niece, nephew, and so forth. Parents may list the beneficiary as the person who will care for their children in the event of their death. In addition, parents may also have a policy that places the life insurance money in a trust fund upon their death. This money may remain in trust until their children reach a certain age, perhaps 18. The surviving child will be allowed to withdraw from this trust when they become an adult. Life insurance policies do allow policy holders to change their beneficiary. This may occur in the event that the beneficiary dies prior to the policy holder, or if the policy holder remarries. Sadly, many second wives and husbands are unknowingly not entitled to any of the death benefit. It is important for individuals who re-marry to change the name of their beneficiary, or else, the death benefit will be paid to their first wife or husband.

Types of Life Insurance
The two most common types of life insurance are term life and whole life. A third choice, universal life, is a combination of term and whole policies.

Term Life Policy:
These policies are issued for a specific amount of time. An individual may have a one, five, or a ten year term policy. The death benefit is only paid to the beneficiary if the policy holder dies within the term period. If the policy holder is still living at the end of the term, the coverage ends, and he or she must renew for another term. The downside to term life insurance policies is that policy holders must complete another physical exam at the end of the term. Thus, if their health has declined or they are diagnosed with an illness, their monthly premium will greatly increase. Additionally, some term policies eventually become non-renewable.

Whole Life Policy:
Contrary to term policies, these policies never end, unless the policy holder cancels the coverage or cease making payments. Moreover, whole policies build cash values that policy holders may borrow against.

Many people select term coverage because the premiums are much lowered than whole policies. A healthy adult may receive a $20,000 term life policy for under $5/month, whereas a $20,000 whole life policy may cost $15/month. As the amount of the death benefit for a whole life policy increases, so does the monthly premium. Young adults generally start with a term policy, and buy a whole life policy when their income increases. The upside to whole policies is that the premiums are fixed. Term policies may fluctuate depending on a policy holder's health.

How Much Does Life Insurance Cost?
The cost of life insurance depends heavily on the health condition of the policy holder, and the probability of death occurring. This is why it is pertinent to receive coverage at a young age. Commonly, younger individuals have less health issues, and are less likely to die prematurely, thus their premiums will be lower. Those who delay buying a life insurance policy until they become ill or older will pay significantly higher premiums, or denied coverage.