Do I Need to Buy Life Insurance?
Buying life insurance isn’t usually fun, but it can be vital to your financial plan. If there are people in your life who rely on your income, life insurance can be essential to ensure that they are protected. But for others, it might not make financial sense.
Figuring out whether you need life insurance and what type that will work best for your family can take some thought. But it doesn’t have to be a painful experience. Keep reading to learn about the different types of life insurance policies, how to determine if you need to buy it, and how much your policy should be worth.
What is life insurance?
Life insurance is a contract between you and an insurance company to provide a lump sum of money to your heirs after your death. In exchange, you pay the insurance company a monthly or yearly premium. People purchase life insurance to help their families replace lost income and cover final expenses after death.
You can choose the amount of money your life insurance policy is for and how long you want the policy to be in effect, either for a few years or decades or as a permanent policy. Remember: The larger the policy amount or the longer you want the policy to be in effect, the more expensive the premiums.
In addition to the length and amount of the policy affecting the cost, finalizing a life insurance quote may require a medical exam before the policy can be underwritten and implemented. The results of your exam may influence the price you pay for life insurance.
How do I know if I need to buy life insurance?
While people with small children are often the classic example of people who need life insurance, others may want to consider buying a policy.
You might be a good candidate for life insurance if you:
- Have children or other family members who rely on you financially and will need a way to replace your income after your death.
- Have significant debt or other financial burdens that your heirs would struggle to pay without a life insurance payout.
- Want to cover your funeral or burial expenses so your heirs don’t have to use your estate to cover the costs.
- Have an adult dependent with special needs who relies on you financially, and you want to ensure they are financially covered after your death.
- Want to create a legacy for a charitable institution or a family member.
If none of these scenarios apply to you, you might not need life insurance. Even if you don’t need a policy now, creating a thorough estate plan is essential so your family knows your wishes if you are incapacitated.
Types of life insurance policies you can buy
There are two general types of life insurance you can buy: term and permanent. Within permanent policies, there are a few options.
Term life insurance is a temporary policy typically available for 10 to 30 years or until a specified age, although that can vary. Customers pay a monthly or yearly premium for the stated term of the policy. The premium is generally calculated based on the age, gender and health of the person purchasing the policy, among other factors. The premium won’t change for the duration of the policy.
If you die while the policy is in effect, the insurance company will pay the agreed-upon amount, or death benefit, to your heirs. If you’re still alive when the policy ends, you won’t get your premiums back or any other financial benefit.
Many people like term life insurance because it usually costs less than a permanent policy. Protecting your family without breaking the bank on premiums can be a good compromise. Keep in mind: The older you are when you get a policy, the more you will likely have to pay. Some term policies can be converted into whole life insurance, but every policy differs.
Whole life: According to the Insurance Information Institute, whole life is the most common type of permanent life insurance you can buy. The main advantage is it lasts your entire life, unless you stop paying the premium and your policy lapses.
Unlike a term policy, whole life also offers a cash value that puts a portion of every premium into a savings account. You may even earn dividends based on the insurance company’s financial performance.
Whole life insurance tends to cost more than other policies. But it may be worth it for you if you want coverage that lasts for your lifetime and you can afford the higher premiums.
Universal life insurance: This policy provides a set death benefit for the insured’s life as long as they pay the premiums and meet any other requirements. Universal life insurance also has a cash value component, generally earning a money market interest rate. You may be able to borrow against the cash value of the policy or potentially adjust the death benefit as the cash value grows.
Variable life: The cash value of this policy can be invested in the stock market, bonds or money market mutual funds. Because of the potential volatility, variable life may earn more than other policies, but it can also mean that your cash value or death benefit shrinks if the market does poorly.
Variable-universal life: Variable-universal combines the features of variable and universal policies. You can adjust your premiums and death benefits (like a universal policy), but you can also invest in the stock market (like a variable policy).
How much life insurance do I need to buy?
Deciding how much life insurance you need can be daunting. After all, there is no one-size-fits-all when it comes to life insurance policies. To help you determine the amount of life insurance you should be looking for, start by reviewing your finances.
In the event of your death, what financial resources would your family have available to replace your lost income? When would those resources become available?
Consider things like:
- Investments or other financial accounts your family may have
- Your surviving partner or spouse’s income
- A group life insurance policy from your employer
- Social Security benefits—if you have children younger than age 18 and the surviving spouse earns less than the income threshold
Note that if your children are older than 18 when you pass (or you don’t have children), your family may not be eligible for Social Security survivor’s benefits. Your surviving partner may have to wait until at least age 60 to claim their Social Security benefits.
To calculate how much insurance to buy, some experts recommend multiplying your salary by eight. Others say to multiply your annual salary by the number of years you have before retirement. Online calculators can be a great way to help you determine how much you need from a life insurance policy.
Shop around before buying life insurance
Like any type of insurance, it can pay to get multiple quotes before buying a life insurance policy. Insurance companies can have vastly different rates and products, so it’s wise to do your homework.
As part of your research, consider the financial health of the company. An insurance policy is no good to anyone if the company that holds it goes out of business or can’t pay the death benefit. Make sure any company you consider is financially sound and has a reputation for paying out claims.
Tell your beneficiaries
Buying a life insurance policy is great, but make sure the essential people in your life know where to find the policy information. Store the policy documents securely, along with the rest of your estate plan and financial details, in a fireproof file box or other safe place. Tell the executor of your estate and your close family members where to find the documents. And make sure to leave a list of financial accounts and login information to make accessing them easier.
Buying life insurance is not a fun topic, but planning for the future can be one of the best gifts you leave your family. Understand the options available to you and take some time to consider how much your family will need to maintain their current lifestyle. If you’re still unsure what type of life insurance policy you should buy or how much it should be, it’s a good idea to work with a financial adviser.
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