Life Insurance

Life insurance is a legally binding contract designed to help protect the financial security and future of your loved ones if you pass away. While your policy is active, your beneficiaries can claim a payment, or death benefit, in the event of your passing. The money from an insurance policy helps cover expenses in the face of the unexpected—from mortgage or rent payments to food and utilities—to help your family maintain their quality of life.

Life insurance works when a policyholder maintains regular premium payments to the insuring company. If the policyholder passes away, the beneficiaries are entitled to claim a sum, known as the death benefit. These funds are typically used to cover expenses, such as funeral arrangements and debts. It's important to note that there are different types of insurance policies, such as term life and whole life—each with different features and benefits.

Determining the right amount of life insurance you'll need depends on a variety of factors, including your income, debts, lifestyle and future expenses. In addition, it's important to reassess your policy during different stages of your life, as your needs will change as your family grows.

There are two ways to determine your ideal coverage amount. The first is called the income-based rule of thumb formula, which says to carry roughly 10 times the amount of your annual salary. The second is called the Debt, Income, Mortgage and Education, or DIME, formula. Debt involves adding up all existing financial obligations. Income considers your current and future income, multiplied by the number of years you think your beneficiaries will need financial support. Mortgage refers to how much you owe on your home, including second mortgages or other lines of credit. Education includes all costs your beneficiaries will need for schooling, such as college or tuition.

In general, life insurance payouts aren't subject to income tax. The beneficiaries will usually receive the funds tax-free.

However, there are circumstances that could result in tax obligations. For example, if the policy payout causes your estate's worth to exceed a certain amount, you might be subject to estate taxes. It's important to consult with a tax or financial professional to understand your specific situation.