For some people, preparing for their own demise might seem a bit strange, maybe even morbid. However, it is actually very practical to plan for the future of those you will leave behind while you still can. No one knows when their life might end, so it's best to prepare for the inevitable.
First and foremost, do not just buy a life insurance policy from the first agent that you see. Keep in mind that no two life insurance policies are the same, and you need to be careful in choosing, or you stand to lose a lot of money. To help you get started, here are some basics of life insurance.
You Have Two Choices: Term and Whole Life
When it comes to life insurance, you usually have two choices: term and whole life insurance policies. Term life insurance, as the name implies, only provide benefits during a certain period. For instance, you can choose a policy that expires once you finish paying the mortgage or until all of your children have graduated college. Once the agreed-upon term expires, then you are no longer insured. In case you pass during the term of your policy, your beneficiaries receive the death benefit in a lump sum amount.
Whole life insurance, as the name suggests, insures you for the rest of your life or while you can still pay your premiums. As you might might, it is much more expensive than term life insurance, and in the old days, it was riskier as well. However, the latter has not changed much, so if an insurance agent offers you a permanent life insurance policy, make sure you understand all of the risks involved.
Get It As Soon As Possible
All insurance policies are the same in the sense that they charge a higher premium when they take on greater risk. For instance, car insurance companies charge a lower premium for a brand new car as compared to one around five years old. The risk here is that the older car is more prone to breaking down so the company may have to pay out more often; the same principal applies to life insurance. If you want lower premium payments, avail of a policy while you are still young. (For related reading, see The Perfect Age to Get Life Insurance.)
You May Need More Benefits
Many people may be impressed at a life insurance policy that provides a million dollars in death benefits; however, if you think about it carefully, the amount is not that much over the long run. Your kids' tuition alone for private or out-of-state universities can quickly eat up a chunk of a million dollars, not to mention all the other debts you may have alongside the costs of a funeral. How much would be left over to provide for your loved ones? One million dollars in benefits may be enough for some, but it may not be enough for your family.
Employer Benefits Are Never Enough
If you think that you don’t need life insurance because your place of employment provides death benefits, then you thought wrong. Employers usually provide three years’ worth of salaries as death benefits for their employees. This looks good on paper, but the family left behind will certainly burn through that sum because they have to pay for funeral and other expenses.
Moreover, even if your company's compensation package can take care of your family after you’re gone, what would happen to them if your employer terminated you right before your demise? Don’t rely solely on your employer’s death benefits, and buy a standalone life insurance policy that you can take with you wherever you go.
Even the Unemployed Need Life Insurance
You may think that stay-at-home moms and dads do not require life insurance as they do not supplement the family income, but you’re wrong. Statistics shows that it costs roughly $40,000 a year to pay someone to do the work of stay-at-home parents, and that amount is not easy to come by, especially in today’s economy. Therefore, even if you or your spouse is unemployed, you need a good life insurance policy to make sure that your family’s way of life does not change too drastically when you leave this earth.
You Must Not Lie
If you think that you can get away with lying to an insurance agent about your current health status to get lower premium payments, then you are in for a rude awakening. When your insurance company finds out, they will cancel your policy without returning any of the premiums you already paid. Either way, you lose out in this equation.
Don’t Hide Your Policy From Your Beneficiaries
How can your family cash in on your life insurance policy if the only person who knows where it is, is you? Yes, your life insurance policy should be in a safe place, but that does not mean you have to keep your hiding place entirely secret. Insurance companies are not in the habit of checking up on their clients to find out whether they are still alive or not. If you were to come to your demise all of a sudden, your dependents would be the ones who would file a claim. If you actually find it difficult to trust the people who are around you, at least tell your lawyer about your life insurance policy. (For relevant reading, see How to Collect a Life Insurance Payout.)
Your Health Affects Your Premium
The terms of your life insurance policy are bound to change depending on your health. For instance, if you suddenly contracted a chronic, incurable disease, you can expect your life insurance premium to skyrocket. As soon as you notice that your health taking a turn for the worse, ask your insurance provider if you can switch from a term to a whole life insurance. Although there is always a chance that your health may recover, it is better to play it safe and switch to an insurance policy that provides better coverage. (Read What Influences Life Insurance Premiums? for an overview of what factors into your insurance costs.)
This 101 article covers the basics of life insurance, but finding the right provider and policy takes a bit of research and time. Don't be too hasty in your decision, and be sure to read the terms very carefully before signing anything.