Life Insurance - The Basics

As the saying goes, the only sure things in life are death and taxes. While it may be difficult to think about preparing for the inevitability of your death, the right life insurance coverage to provide for your loved ones will bring you peace of mind today.

This article is the first in a three-part series on Life Insurance. This type of insurance makes sure our loved ones are provided for at the time of our death, and the expense of our funeral arrangements does not put an unnecessary burden on our family.

The purpose of life insurance is to provide replacement income to our families when we are no longer alive. A life insurance policy provides a death benefit or specific payment to a defined beneficiary at the time of the insured's death. If you support or participate in supporting a family, you probably have given some thought to a life insurance policy.

As with any type of insurance, understanding the basics about life insurance is the first step in evaluating what type of policy is right for your unique circumstances.

• The person making the payments on the policy "owns" the policy. In some cases, the policy owner is the same as the insured, but not always.
• The "insured" is the individual covered by the policy.
• The "benefit" is the amount to be paid at the time of the insured's death.
• The named beneficiary will receive the benefit at the time of the insured's death.

Other articles in this series focus on the different types of policies available: term, or temporary, insurance and whole, or permanent, life insurance. The remainder of this article provides information that will help guide you through the decisions you will make about your own needs.

Let's begin with the most basic decision about your insurance - which insurance company should get your business. You may get a discount for having both your automobile and life insurance coverage with the same carrier, but you'll want to have some confidence that the insurance company you choose will be around to pay the benefit at the time of your death. Ask your friends and family about their insurance for suggestions on carriers. The National Association of Insurance Commissioners has aConsumer Information Source which provides complaint statistics and financial data for major U.S. insurance companies. You can also look at Standard and Poor's Insurance Company Credit Ratings.

How much life insurance you'll need depends on several variables. You'll need to consider both the current financial demands of your loved ones, as well as their changing needs over time. Consider these questions:

• Are others dependent on your income? If not, you probably don't need life insurance. Put your money into savings or retirement funds instead of worrying about life insurance right now.
• If you and your spouse both work, what is the percentage of income that you bring to support your family?
• If you have children, do you want to provide for their college educations, and how long will they require financial support until they are able to support themselves?
• What assets have you already accumulated?
• Does your employer provide a life insurance policy?
• What financial burden will your death create on your loved ones?

Insurance experts suggest creating a worst-case scenario to begin examining the financial impact your death will have on your family. If you were to die tomorrow, what would your family need financially? How would they pay your funeral and burial expenses? What debt do you currently have, and what other income or assets are available to help cover that debt? Your personal situation answers these questions. At the other end of the spectrum, what expenses exist if you live to the age of your life expectancy? What plans will you need to make for your surviving spouse? Take advantage of the CareOne Credit budget calculators to help you organize those financial details and to provide a figure to begin your life insurance planning.

People frequently carry much more life insurance than they really need. As your life changes and your responsibilities as a provider change, you'll want your life insurance coverage to reflect those changes. While your children are young, you'll need to provide for day care and education. As they grow up and develop families of their own, their financial dependency on you changes. Have a plan to review your life insurance coverage to make these types of adjustments. For more information, see the State of Washington's A Consumer's Guide To: Life Insurance.

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