Life insurance is one of those topics people mean to look into someday, but someday has a way of getting put off. At its core, life insurance is about making sure the people who depend on you are not left scrambling financially if you are no longer there to provide for them. Here is a plain-language look at the basics to help you start the conversation.
Why consider life insurance at all
Most people think of life insurance as a way to replace lost income. If you are a wage earner and something happens to you, life insurance proceeds can help your family keep up with everyday expenses.
It can also help your loved ones avoid being forced to sell a home or other assets just to cover bills, debts or final expenses. Generally, death benefits paid to beneficiaries are not subject to income tax, though business-owned policies can involve other tax considerations. Tax rules change and can be complex, so this should not be treated as tax advice. Talk with a qualified tax professional about your specific situation.
Figuring out how much coverage makes sense
There is no single formula that works for every household, but a few categories of need are worth thinking through.
Consider immediate costs that would come up right away, ongoing monthly expenses your family would still need to cover, and longer-term goals like helping a child through college or supporting a surviving spouse's retirement.
Some people use a rough guideline of multiplying annual income by a range of years as a starting point, but this is only a starting point. A closer look at your actual household budget and goals will give you a better answer. We are happy to walk through a needs analysis with you.
- Immediate expenses: final medical bills, funeral costs, outstanding debts
- Transition costs: time for a spouse or partner to adjust, find work, or relocate
- Ongoing needs: monthly bills, childcare, tuition, retirement savings
Term versus permanent coverage
Life insurance generally comes in two broad flavors. Term insurance covers you for a set period of time, such as while children are young or a mortgage is outstanding. Permanent insurance is designed to last your entire life and can build cash value over time.
Each approach serves a different purpose, and many families use a combination. We can walk you through how each type works and what might fit your situation.
What happens if you miss a payment
Most policies include a grace period, often around a month, to catch up on a missed premium before the policy lapses. If a policy lapses, reinstating it may require proof that you are still insurable.
Permanent policies with cash value sometimes allow the insurer to draw on that value to keep the policy in force, with your approval. Term policies do not have this option because there is no cash value built up.
Riders worth knowing about
Insurance companies often offer optional riders that add flexibility to a base policy. Availability and details vary by carrier and by state, so always confirm what is actually offered on your policy.
A waiver of premium rider can suspend your premium payments if you become totally disabled for a period of time. An accidental death benefit rider adds an additional payout if death results from an accident. Accelerated benefit riders, sometimes called living benefits, may let you access some policy proceeds while still living under certain circumstances, such as a terminal diagnosis or need for long-term care. A child rider can add a modest amount of coverage on your children.
Choosing and naming beneficiaries
Always name a backup, or contingent, beneficiary in case your primary beneficiary is no longer living when a claim is made.
Naming a specific person, rather than your estate, generally allows proceeds to reach your family faster and outside of probate.
Be as clear as possible in how you word beneficiary designations, especially around children, and remember to update designations after major life events like a birth, marriage or divorce.
Should you ever replace an existing policy
Sometimes a new policy truly fits your needs better, but replacing an older one deserves a careful second look first.
Your health may have changed since you first applied, which could affect new rates. A new policy's cash value may take time to catch up to an older one. Before canceling anything, make sure the new policy is fully approved and in force, and compare costs and features side by side.
If you are single, do you still need coverage
Often, yes. Even without dependents today, circumstances change. Buying coverage while younger and in good health can lock in insurability for the future.
Single, self-supporting adults may also want to look at disability income coverage, which can help replace income if illness or injury keeps you from working, along with health insurance if you do not have coverage through an employer.
Life insurance decisions are personal, and the right amount and type of coverage depends on your family's situation. The team at Flynn Insurance Agency in Kings Park has been helping Long Island families sort through these questions for generations. Stop by 8 Main Street or give us a call to talk through your options.
This article is general information, not legal, tax or financial advice. Coverage depends on the terms, conditions and exclusions of each policy. Talk with a licensed agent about your situation.
