Life Insurance

Life insurance generally is designed to pay a certain sum upon the death of the insured. The insured may purchase life insurance on his or her own life. The insured names someone else as the beneficiary-the person to receive the insurance proceeds when the insured dies. If another party has an insurable interest in the insured's life, the other party may purchase life insurance on the insured's life. A husband, for example, has an insurable interest in his wife's life because he may suffer an economic loss upon her death. He can purchase insurance on his wife's life and name himself as the beneficiary. Some policies cover both husband and wife but pay based on the first of them to die, while other policies cover a married couple and pay when the second dies. In some circumstances a small business or partnership may have an insurable interest in certain personnel essential to its operations and will purchase a so-called key-man life insurance policy to cover the loss to the business caused by the key-man's death.

Most life insurance policies allow the insured to name a contingent beneficiary in case the first beneficiary (the primary beneficiary) is dead, missing, or otherwise cannot collect. Although many people name minor children as primary or contingent beneficiaries, a minor child cannot collect on the life insurance. This often results in the need for a court to appoint someone to collect and manage the insurance benefits on the child's behalf.

In the event of divorce, the insured should review his or her beneficiary designations. In some states, a divorce immediately revokes any beneficiary designation to the insured's former spouse. In other states, the ex-spouse may still collect the insurance if specifically named as a beneficiary.

There are many varieties of life insurance. Term life insurance pays the beneficiary if the insured dies during the period of time the life insurance is in effect. Term insurance usually covers a short period of time, such as five years. To continue the insurance beyond the time period, an insured must purchase new term insurance. If the insured does not die during the policy period, the insurance company does not make any payment to the beneficiary or the insured. There is no present cash value to term insurance while the insured is alive.

Permanent life insurance takes many forms. Whole life, universal life, variable life, and variable universal life are just some of the products available. Permanent life insurance has no fixed time period. It covers the insured for life. Permanent life insurance can build up a cash value that the insured can borrow against during his or her lifetime. In some instances, permanent life insurance may mature during the insured's lifetime. The policy matures when all of the agreed upon premiums have been paid. If that happens when the insured is alive, the insured may receive the insurance benefit.

In most instances, life insurance covers against death caused by any of a variety of factors. However, there also are life insurance policies available that cover specific risks, such as accident, cancer, or death while traveling. Some life insurance policies allow the insured to collect benefits prior to death, such as when the insured has been diagnosed with a terminal illness. There are also some companies that will purchase a life insurance policy from an insured so that the insured can receive some payment during his or her lifetime.

Determining the amount of life insurance can be complex if you desire to avoid either being under-insured, leaving your survivors with less than they need, or over-insured, spending money needlessly. A qualified life underwriter is an invaluable member of the estate planning team who can advise you on the amount and type of life insurance that best meets your needs. Filling out the Worksheet: How Much Life Insurance Do I Need? provides a good starting point. The underwriter may also request additional information regarding income.

Worksheet: How Much Life Insurance Do I Need?

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How Much Life Insurance do I Need?

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