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Of all your financial needs, life insurance may be the one of the least pleasant to contemplate. But it is an important part of your family's financial plan and it is essential to protect your dependents if you should die.
The main purpose behind life insurance is to replace income lost because of the death of a wage earner, but it can also be used to pay funeral expenses, provide immediate cash for estate expenses, to pay off debts and, in some cases, to provide college or retirement funds.
How much do you need?
What you need to consider when you sign up for life insurance coverage? Consider the financial needs of your family following your death. If there are no additional family sources of income, determine what amount -- invested at a conservative rate of interest -- would be required to sustain your family. Many employers provide a flat amount of life insurance coverage based on your annual income. Supplemental insurance is also available for purchase through many employers.
Review your insurance coverage regularly to ensure the amounts are still appropriate to changing circumstances. As you age, your coverage may be reduced, but you may have the option to convert the reduced amount to an individual policy.
Some insurance companies make some "living" benefits available after a covered individual is diagnosed with a terminal illness. Check the details of your policy to determine if this is the case with your life insurance.
Beneficiary designation
You will need to name a primary beneficiary(ies), which could be one or more individuals, your estate, a trust or an organization. You may also name a secondary beneficiary(ies) to receive benefits should your primary beneficiary(ies) die before you do. If you name minor children or a trust as your beneficiary(ies), you may want to consult with an attorney to ensure that the benefits will be paid as you intended. Review the beneficiary designations regularly if there are any changes in your life such as divorce or the addition of new children.
Exclusions
Insurance policies will not cover deaths that are a result of certain causes. These are called exclusions. Typical exclusions include death due to military service or acts of war, self inflicted injuries (whether they are intention or not), deaths that are a result of the insured's felonious acts or that occur when the insured is either on board a plane as a pilot or in a hang glider. Refer to your plan documents to review the exclusions under your plan.
Good record keeping tips
It is a good idea to let your beneficiaries and your attorney know about the existence of your life insurance policies as well as the location of important papers, such as your will, that will be helpful in the case of your death. You may want to keep policies and wills or copies of each in some location other than a safety deposit box since in some states, safety deposit boxes are sealed after the owner's death, and it may be months into the probate process before survivors have access to its contents.
Filing for claims
Your attorney or beneficiary(ies) can call the insurance company to determine what proof of death is required. Some insurance companies will be willing to pay part of the coverage before a final death certificate is available in special circumstances, such as when a death is under investigation and your dependents are in immediate financial need.
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