Who and What Do You Need to Cover to Make Sure Your Family is Secure?

The number of American life insurers has fallen rapidly in recent years, declining by more than 50 percent from the industry's late-1980s peak. Nevertheless, there are still nearly 1,000 agencies operating in the United States today. Thanks to brutal competition between insurers, life insurance shoppers have a dizzying array of seemingly interchangeable policies from which to choose.

Whole Life Insurance vs. Term Life Insurance

The differences between whole life insurance and term life insurance are well-documented. The former is typically regarded as an investment vehicle best suited to supplementing a tax-deferred retirement account. The latter is generally more affordable and confers a greater return on investment if the policyholder dies during the specified term. Its relative cheapness and flexibility drives many consumers to choose term life over whole life.

Should You Add on Supplemental Coverage?

Many term life policies offer "riders," which are supplemental coverages that require policyholders to pay additional premiums. Many of these riders mimic the cash-value benefit of whole life insurance by specifying situations in which all or a portion of a policy's death benefit may be paid out before the policyholder dies. This is typical in cases of acute or terminal illness: As their medical debts pile up, beneficiaries often cannot wait to receive death benefits.

Some term life insurance policies have coverage gaps that may escape the notice of careless prospective policyholders. These may take the form of "exemptions" for which the insurer waives its obligation to pay death benefits and commonly include suicide, some forms of accidental death, "suspicious" deaths that may involve foul play, and fraudulent death claims. With the exception of the last exemption, there are often ways to guarantee coverage for these types of circumstances. For instance, many term life insurance policies offer an accidental death rider.

Designate a Beneficiary

Properly designating a life insurance beneficiary is just as important as securing adequate coverage. Most policyholders designate their surviving spouse or an adult child as their primary beneficiary. Since federal law waives the estate tax on benefits that pass to a surviving spouse, the former option may be the most tax-favorable.

In addition to the primary beneficiary, who receives death benefits once the policyholder passes on, most experts recommend selecting secondary and final beneficiaries as well. Secondary beneficiaries continue to receive the policy's death benefits after the primary beneficiary's death while final beneficiaries, who may be distantly related to the policyholder, receive whatever remains after the secondary beneficiary dies. Alternatively, it's possible to name multiple beneficiaries to receive a policyholder-determined percentage of a policy's death benefit.

Not Purchasing Life Insurance May Put Your Family at Risk

Individuals who fail to purchase some form of life insurance may be putting their families at risk. If an uncovered head of household's death occurs after a lengthy illness, their family may be forced to take drastic steps to retire their medical debt. These might include taking out a second mortgage, selling their home, or even declaring bankruptcy.

Depending upon the life stage in which an uncovered individual dies, they may also leave their family with no means of paying for expected future obligations. Life insurance provides grieving families with a tangible income stream that can be used to pay for education, weddings, new homes or simply to cover household expenses. Many surviving spouses with young children elect to receive death benefits as an annuity to ensure a long-term income and avoid having to work full-time outside of the home.