Life insurance could be called death insurance because it is to protect your family in the event of your death. Long ago, insurance companies found most people would shy away from an insurance policy that talked about death, let alone insure against it so they chose to call it life insurance.
Before buying life insurance, you need to do a little thinking and a lot of research. There are a few questions you need to answer and some decisions you need to make.
Question 1: Do you really need life
insurance coverage?
To answer this question, you need to know the purpose of having
a life insurance policy. This purpose is to protect your loved
ones from financial disaster if you should die. This could be
to pay off a mortgage, pay for a child's education,
supplement or furnish income for your family, to cover estate
taxes, or to pay taxes on your retirement distributions so the assets stay intact .
If you are single with no dependants, you might not need life insurance. If you are single but have dependants who would be left financially despondent if you were to die, you would need some sort of life insurance to provide for their well being.
Question 2: Can you afford life insurance?
If you are
fairly young and healthy with no bad habits, life insurance
is probably affordable. Life insurance could be quite expensive
or impossible to get for someone who is older, someone with a
life threating illness, or someone with habits that could cause a
health condition. A 60 year old sky diver with heart trouble
and a tobacco habit will probably have a hard time getting
affordable life insurance. Only you can decide if you can afford the premiums for a life insurance policy and whether the cost is justified.
Question 3: Will a life insurance policy protect your estate?
Take a good look at your estate and how you've planned for those
who will inherit the bulk of it. Will a life insurance policy
help pay some or all of the taxes? Your estate planning will
dictate how much life insurance might be needed to cover
these expenses for those in your will. If your retirement plan consists of traditional IRAs and you don’t feel you will need this money in your lifetime, you might want to consider a life insurance policy to cover the tax burden to your heirs.
Question 4: How much life insurance will you
need?
This depends on the ages of your family, your lifestyle, your debts,
how long you need to provide financing, and how much taxable money you might leave to your heirs. Take a look
at the ages of you and your spouse and your life expectancies
and then consider your health when making your decision. You
also need to consider whether or not your spouse will be able
to provide income after recovering from your death.
When you finally decide that you do need to purchase life insurance, proceed with caution. Be sure you understand exactly what you are purchasing, how it works, how it pays at death and so on. There are many types of life insurance and what works for one person might not be right for another. Do your homework. Discuss your decisions with your family. If you are an older person with grown children who stand to inherit your taxable retirement funds, you might ask the children to take out life insurance policy on you. This way, when you die, he/she will receive the money from the policy and it won’t be placed into your estate.
Bottom line is a life insurance policy that is set up correctly could be one of your best retirement planning decisions. It could mean the difference between your heirs getting all of your retirement distributions or the government getting a sizable chunk of your hard earned money.