Life insurance is a complicated thing. If you’re planning to purchase life insurance, don’t rush it. Consult an insurance agent, preferably one who isn’t tied to recommending products from a single company, and compare your current financial needs to those in your future. Once you have a life insurance policy, schedule time to periodically review your policy as you get older. As they say, “Life happens!” and changes both big and small may require you to revise your policy accordingly over time. Below are just seven things your life insurance policy should address. It is not an exhaustive list, so check out the links we provide for additional details and resources for your research.
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Name your beneficiaries:
Proceeds from your life insurance policy will be paid immediately to named beneficiaries. The wording you use for each beneficiary is extremely important. Be aware that naming your beneficiaries under the blanket term “estate” means the money will go to probate court, and be tied up for months as a result. You can make changes to your beneficiaries over time as necessary. A secondary beneficiary or “contingent” will receive proceeds if the primary beneficiary dies before you and before you have time to revise your policy.
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Your potential financial needs:
Your life insurance policy should reflect your current financial situation, and take into account the goals and requirements of your family and beneficiaries once you are gone. Your life coverage should be balanced with any other insurance policies you have, including short-term disability, homeowners, and auto insurance. Review your plan regularly with a trusted investment advisor to be sure your policy addresses your current and future finances as comprehensively as possible.
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Your mortgage:
A mortgage is just one of possibly several expenses your family will have to take care of when you die. With this in mind, financial experts recommend consumers consider purchasing a good term life insurance policy as opposed to a mortgage life insurance policy, for better, more comprehensive and cost-effective coverage. Paying an unchanging premium for a mortgage life insurance policy over time pays down your mortgage, but drastically reduces the final amount of money that will be left to your beneficiaries. A term life insurance policy will provide your heirs a better payoff in the end, and better help with any unpaid expenses.
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How benefits will be distributed:
Money from a life insurance policy can be distributed in a number of ways. A lump sum distribution is basically a one-time payout in cash. An interest option pays out the money at a later time, with a minimum guaranteed rate of interest paid to the beneficiaries. The installment option is good for policy holders who want to be sure that their beneficiaries don’t spend all of their money at once. Life income distribution works like an annuity, paying out installments over time based on the beneficiary’s life expectancy. Consider what’s in the best interest for each of your beneficiaries, and consult your insurance provider for additional guidance.
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Life changes:
Marriage, divorce, the birth of a child, a death in the family — these are all life changes that may require you to revisit and revise your life insurance policy. With the arrival of children, you may want to extend the length of your coverage until each child reaches adulthood. In the event of a divorce, it’s important to designate who will be the owner of an existing life insurance policy, and make sure that any children will be provided for if the policy expires or the beneficiary designation is changed.
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Long-term care for your parents:
You may want to consider having a portion of your insurance benefits allotted toward the healthcare of your parents or siblings who are disabled and need special care. That way, if you die before your parents do, you can pass along to them some much-needed financial support. Aging parents have the option of converting their life insurance policies to a long-term care insurance policy. However, such policies come with expensive premiums. Saving and setting aside money for future long-term care through some other form of investment may make more financial sense in the long run.
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Charitable donations:
In the end, you can’t take it with you. So if you’ve always wanted to make a substantial donation to a particular charity and perhaps leave as your legacy a gesture of such giving, consider doing so with your life insurance policy. You can add what’s called a “charitable rider” to your policy to provide a small monetary gift to the charity of your choice. If you’re wealthy, gifting a policy allows you to donate a significant amount of money and reduce the size of your taxable estate as a result. As always, consulting an insurance agent or financial advisor will provide you with the details you need for this and any other items to address in your policy.
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