The Basics of Life Insurance

Although there are many risks you can avoid, you can't avoid the risk of death. Life insurance is a way to help protect your family after you die.

Life insurance is designed for the living, not the dead.

The insured--that is, the individual generally paying the premium--will never see the life insurance benefit. This tax-free benefit will be passed on to the beneficiary of the insured's choice.

Many family child care providers are under insured and should examine whether life insurance is right for them.

The two main types of life insurance are term and permanent.

Term Insurance

Term insurance will provide coverage for a specified number of years, typically ranging from 1 year to 20. If you are still alive after the term is up, your insurance will have expired and your beneficiary will receive nothing.

Here are two situations where you may want to consider term insurance:

First: You have young children who rely on your income. You want to protect them in case you die before they graduate from college and can make it on their own. If your last child will graduate in 15 years, you may want to consider a 15 year term insurance policy.

Second: You are caring for your aging mother who is 75 and relies on you for financial support. You may want to consider a 15-20 year term insurance policy to make sure she won't have any financial worries if you die before she does.

The number of years of a term insurance policy will determine the price of the coverage. For example, a 20-year term policy will be more costly than a 5-year term, the reason being that the insured is covered for more years. The life insurance company is more likely to pay the death benefit of a 20-year term and will charge accordingly. The cost of term insurance can rise over the years of your policy.

Other factors that usually increase an individual's premium are gender, age, health, death benefit, smoker and heredity. It doesn't seem fair that you should have to pay higher premiums because your father had a heart attack, but that's the way it works. Unfortunately, life insurance companies can charge higher premiums to take on these additional risks.

Permanent Insurance

Permanent insurance is very different and can be confusing because it can be called by different names: variable, whole universal, and cash-value life insurance. The general advantage of permanent insurance is that it will cover your entire life. The premiums will not change and if your health deteriorates you will still be covered.

A situation where you may want permanent insurance is when your spouse relies on your income and would struggle financially if you died. Or if you have a child with a disability that will need ongoing care for the rest of her life.

Think of term insurance as renting a house and permanent insurance as buying a house. Term is usually cheaper in the short-run, but with a permanent policy you're building cash value that could be compared to equity. This cash value accumulates tax deferred and you can usually borrow against your policy for emergencies. However, don't buy permanent insurance for the cash value benefit. It's expensive and you are better off building up an emergency fund and retirement fund before purchasing a lot of permanent life insurance.

How Much Insurance to Buy?

After deciding between term and permanent insurance, the next difficult step is to determine how much death benefit to purchase.There are numerous ways to calculate this number. Basically, you want enough insurance to provide adequate support for your beneficiary after you die. This will obviously vary greatly from one person to another, so don't look for a simple, one-size-fits-all answer. In fact, not everyone needs life insurance.

There are a number of on-line insurance calculators to help you in this process: here and here.

Life insurance is particularly important if you have dependents. I recommend shopping around for life insurance coverage. This entire process can take some time. Be patient. Work with an independent life insurance agent who can sell you a policy from a number of different companies.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.thebluediamondgallery.com/financial03/l/life-insurance.html

A previous version of this article was written by Mari Millard and posted on www.thinksmall.org.

For more information about life insurance, see my book Family Child Care Legal and Insurance Guide.