Life insurance

Life insurance can protect your family's finances by providing them, or whomever you choose as the beneficiary of your policy, with a lump sum of cash called a death benefit when you die. Your beneficiary does not owe income tax on the payment, but its value is included in your estate if you own the policy. 

Why buy life insurance?

If your income supports a spouse and child, the payment from a life insurance policy can ensure that they will be able to pay final expenses and routine household expenses during the period immediately following your death. If you anticipate your family's future goals as you begin your insurance planning, your policy may provide enough income to also pay future college expenses or help your survivors meet other important goals.

You may also want to buy life insurance if your income goes into a jointly funded household budget. The absence of one income stream could create a similar need for cash in a time of stress. Or your income may be the reason your family enjoys the lifestyle they do — something you'd rather they could continue to enjoy. Even if you're not earning income, you may still want to consider life insurance. If you stay home with your children or your elderly parents, think about what it would cost your survivors to pay for the value of the homemaking services you provide.

But before you buy insurance, be sure you have a clear picture of why you need the coverage, how long you expect to need it, and how much you can afford to pay in premiums.

Types of life insurance

There are two basic types of life insurance, term and permanent.

Term insurance

The policy lasts for a certain amount of time, called the term. You pay premiums during that time, and if you die during the term, your beneficiary will receive the amount of the death benefit. Once the term is over, you can either renew the policy or choose to no longer be covered by life insurance.

Permanent insurance

The policy is in effect for your lifetime. You pay premiums for a set amount of time, sometimes throughout your life. When you die, your beneficiary will receive the amount of the death benefit. You also accumulate a cash value account as you pay your premiums. You can borrow against this amount, and, if you cancel or surrender your policy, the company will pay the balance, after fees and charges, as a cash surrender value.

If you're uncertain about the best decision to make, you may want to speak with a fee-only insurance consultant who will evaluate your situation and the various policies you are considering. There is a cost, but a fee-only consultant does not sell policies and has no vested interest in the decision you make.