20 Common Questions & Answers About Life Insurance, You may be asking yourself if you should be considering purchasing life insurance. Perhaps you think that you are to young or that you have no health issues, so you are unsure on the matter of life insurance. It is important to remember that a medical catastrophe or accident may happen at any time. Here are 20 of the most common questions asked about life insurance to help you as you make your decision.
1. What is life insurance?
Life insurance is insurance that pays a money amount to the beneficiary (another person that you specify) that is listed by the insured in the event of the insured’s death. Basically, life insurance is a contract between you and the insurance company where the insurance company agrees to pay money to the loved one you designate to receive the money, if you die, as long as your life insurance premiums, also known as your payments, are current.
2. What are some reasons as to why I should purchase life insurance?
Life insurance will pay money to your family when you pass. The money received, called a death benefit, can provide financial security to your family. If you are the primary wage earner, life insurance can aid your family in overcoming any financial burdens while coping with their loss.
3. What is a beneficiary?
A beneficiary is the individual or organization to whom your death benefit is paid in the event of your death. You may choose a spouse, child, friend, or domestic partner as the individual. Often, a non-profit organization can be a beneficiary. It is also recommended to have a contingent beneficiary. A contingent beneficiary is a secondary beneficiary. The contingent beneficiary receives the death benefit in the event you outlive your primary beneficiary.
It is very important that you name a beneficiary and contingent beneficiary. If you do not, then your life insurance death benefit will become part of your estate upon your death. While life insurance benefits can be paid to your beneficiary immediately upon your death, if the benefit becomes part of your estate, then it will have to be probated along with the rest of your estate, which could take some time.
4. Will my beneficiary have to pay income tax on my death benefits?
Generally your beneficiary will not have to pay federal income tax on the death benefit that they receive. However, your beneficiary may have to pay income tax on any interest that is garnered from the benefit. For example, if your life insurance policy had a benefit of $70,000 and your beneficiary received $70,000, then no income tax would be owed. If your policy had garnered interest on a $70,000 policy and paid $70,100, then your beneficiary would be responsible for the $100 interest the benefit paid.
5. How much life insurance should I purchase?
Every person has different needs. The largest factors to take into consideration are your basis of income and your financial obligations. It is recommended by the majority of financial advisors that you take a take out a life insurance policy that will pay your beneficiary an amount equal to seven to ten times the amount of your annual income.
6. What are the different types of life insurance?
There are basically two types of life insurance. These are term life insurance and permanent life insurance. Term life insurance is insurance that pays during a certain time period. For example, those persons who owe on a mortgage or are paying college tuition for a dependent may purchase term life insurance in order to cover these expenses should you pass away while owing on these financial obligations.
Permanent life insurance is life insurance that offers protection for the entire time of coverage as long as the premiums are paid and kept current.
You can also learn about all types of life insurance here.
