Looking to buy life insurance, but not sure where to start? This guide will help you to:
- Decide if you need life insurance
- Pick the best policy for your needs
- Determine how much coverage you need
Do I Need Life Insurance?
If you have people who depend on your income to survive, life insurance needs to be a part of your financial portfolio. With a life insurance policy in place, you don’t have to worry about how your family would get by without you because you’ve made sure they would continue to be provided for.
Your life insurance could be used to:
- Cover your family’s living expenses
- Pay for funeral expenses
- Pay off debts (medical bills, credit cards, loans, etc.)
- Cover estate taxes and fees
- Pay your children’s education expenses
- Provide an inheritance
- Pay for new expenses resulting from your death (day care, housekeeping, health insurance, etc.)
Which Type of Policy is Right for Me?
Life insurance comes in many flavors, but term life and whole life insurance are by far the most common options. Here’s an explanation of both:
Term Life Insurance
Term life is the cheapest and most popular form of life insurance. Basically, you choose how long you’d like to be insured – 5 years, 10 years, 20 years, 30 years – and how much you’d like to be insured for; and then, you’re insured for the duration of that term (or as long as you remain current on your premium payments).
Reasons to Buy a Term Life Policy:
- It’s cheap – selecting a term reduces the insurance company’s risk and your premiums
- It’s customizable. You decide what you want in a policy, and that’s exactly what you get
- Premiums are usually fixed, so you don’t have to worry about future price increases
- It’s straightforward. You choose the term, and you’re covered for that term.
Whole Life Insurance
Whole life is the popular choice among individuals looking for permanent life insurance. For this type of policy, you choose how much you’d like to be insured for; and then, as long as you maintain your premium payments, you’re covered for life.
A whole life policy is unique in the fact that it is one part insurance and one part investment. A portion of each premium payment is invested on the policyholder’s behalf, and overtime the policy builds cash value that can be tapped, borrowed against or used as collateral.
Reasons to Buy a Whole Life Policy
- It’s permanent life insurance. You’re insured for life – even if health problems arise down the road
- It doesn’t have to be renewed. As long as you make your premiums your policy remains in effect
- It automates your savings – each time you make a premium payment you’re investing for the future
- The premium doesn’t go up – you’ll pay the same amount whether you’re in the first or fiftieth year of your policy.
Other Life Insurance Options to Consider:
Universal Life Insurance
Universal life is another permanent life insurance option. It builds cash value just like a whole life policy, but allows far more flexibility. You can increase or decrease coverage as your needs change; and use the cash value of your policy to pay for some or all of your premium, if you so choose.
Mortgage Life Insurance
Mortgage life is a type of life insurance that pays off your mortgage if you die (or in some cases, if you become disabled) before you have paid off your mortgage loan. The insurance payout cannot be used for any other purposes.
Accidental Death Insurance
Accidental death and dismemberment insurance (AD&D) is a type of life insurance that pays out if you die or are dismembered in an accident. It does not pay out for any other causes of death.
How Much Coverage Do You Need?
Many insurance agents and financial experts like to use fancy calculators and formulas to determine how much insurance an individual needs – the recommendation that you purchase so many times your yearly income is especially common – but when it comes to purchasing life insurance, it’s really best to take your personal circumstances and goals into consideration – and no calculator or formula can do that for you.
To determine how much coverage you need, start by asking yourself the following questions?
- How much of your family’s income do you provide?
- Are there outstanding debts like a mortgage, medical bills or credit card balances that need to be factored into your planning?
- Do you intend to cover your children’s education expenses?
- Do your parents (or other members of your extended family) rely on you for financial support?
- Would you need your insurance to cover funeral expenses?
- Would your family need to be able to pay for day care or help around the house, if you were to die?
- Would your family lose their health insurance, if you died? How much would it cost for them to purchase a replacement policy?
- Would your spouse require career training to boost his/her earnings? How much would that cost?
- Would your family want to take time off after your death? How much time? How much would that cost in lost wages?
- Are there people or organizations that you would like to leave money to?
Life Insurance Shopping Tips
Before you start your search for a life insurance policy, spend some time considering your specific insurance needs. This will make it easy to weed out the policies that aren’t right for you and greatly speed up the shopping process.
Not sure which companies you can trust? Refer to the American Insurance Association website for a list of member’s that are in good standing. (with American Insurance Association website linked to: http://www.aiadc.org/AIApub/landing.aspx?m=1&v=30&docid=313501)
Found a Good Deal on Life Insurance?
Don’t make a purchase until you’ve gotten at least three quotes and have read all of the fine print carefully. It may take a bit of work to find the right policy, but your family’s financial security is certainly worth it.