No one likes thinking about their death or the death of a loved one. It’s human nature to push those thoughts and fears aside. But death is the one life event guaranteed to happen to everyone so it's important to plan for it. A life insurance policy won’t remove the sting of the painful loss, but it can save loved ones from the additional trauma of an unexpected financial burden. Choosing the right policy is important and this article will help you answer the first three questions you should ask yourself when making that important decision.
Do I Need Life Insurance?
When you purchase a life insurance policy, you will pay regular premiums (monthly, quarterly, or annually) to the insurance company. In return, the insurance company will pay a certain amount to your beneficiary in the event of your death to help ease the financial strain that your passing may cause on your loved ones. This payout helps your family maintain their standard of living after you are no longer able to serve as an income earner.
If you have a mortgage payment, life insurance will ensure that the bank won't have to repossess your home if your family cannot afford the payments after your death (but be sure to consider the Top Reasons to Forgo Mortgage Protection Life Insurance). Even if you don’t have a mortgage payment, life insurance is still the best way to make sure that anyone who relies on you financially—be it a spouse, a child, or a business partner—is taken care of. If you have any dependents, anyone who relies on your financial contributions, or a mortgage payment, getting a life insurance is a good idea.
Even if none of these considerations apply to you, you may still consider getting life insurance as an investment option (learn more in Insurance as an Investment). Certain policies have an investment component and may be used as part of your long-term financial planning. It is important, however, to prioritize your financial goals and investment opportunities, and most people shouldn’t use life insurance as a form of investment until they’ve exhausted other options and accomplished other financial goals (including paying off all non-mortgage debts, setting money aside in an emergency fund, and maxing out your 401(k) or Roth IRA as a retirement fund).
What Kinds of Polices Can I Choose From?
There are a number of different life insurance options that you should consider before choosing the policy that is right for you.
A term life policy provides coverage within a set period of time (30 years, for example). If you are staying on top of your premium payments and die within that term, your beneficiary will receive a payout to help with the loss of your income. Term life policies typically have less expensive premiums than variable or whole life policies and will allow you to get the most coverage for the least amount of money. However, if you do not die within the set time of your term policy, you’ll get no money back once the term runs out. It is important to weigh out the cost of monthly premiums with the length of time you need coverage for your family and, should you choose a term life policy, at least consider your plan of action for protecting your family once the term runs out.
Like a term life policy, a term universal life policy provides coverage for a set period of time. However, this option is a bit more flexible, often allowing you to extend the term once you’re in it or change it as you go to reflect changes in your financial situation.
A whole life policy does not limit your coverage to a set period of time but, instead, provides coverage for your entire life—as long as you keep paying your premiums, of course. While this may sound like a better option at first glance, the premiums can be much more expensive than those of term life policies, so make sure you weigh the costs and choose a plan you can afford.
If you prefer a middle-of-the-road option, you may consider a blended life policy. As the name implies, this option blends the term life policy with the whole life policy. Future dividends paid on the policy in its early days are later used to convert term coverage into permanent coverage as you age.
Universal life policies and variable life policies contain an investment option. The face value of your policy can rise or fall with the market. The payout in the case of your death may be only for the face value of your policy or may combine the face value with a cash value as well. Again, you shouldn't rely on life insurance as an investment option until you have accomplished other financial goals and exhausted other investment options, including your retirement fund.
How Much Coverage Do I Need?
Your life insurance policy exists to take care of your loved ones. They may rely on the payout for years, which means you may need more coverage than you first think. A good rule of thumb is to attain coverage that is worth ten times your annual income. This will help your family maintain the standard of living to which they are accustomed. There are also numerous tools available online to help you determine how much life insurance coverage you need, including this one from Bankrate.
When choosing a life insurance plan, it is important to weigh out the size of the coverage with the ongoing cost you will incur. Premiums vary based on the amount and type of coverage. Insurance companies often take age, sex, health, and lifestyle (i.e. smoking or heavy drinking) when determining your premiums. Pre-existing conditions may lead to higher premiums or even denial of coverage. Make sure you can afford the premiums now and keep an eye on them in case they increase at some point down the road.
What Should I Do Next?
Although the number of options may seem overwhelming at first, it is important that you not become frozen in indecision. Speak with an insurance agent who can not only help you find the best policy for your needs while also look for ways to save you money (consider these 5 Questions to Ask Before Choosing an Insurance Agent).
With their help, look for a policy that will cover all or most of your income for as long as your family will need it, make sure you can afford the premiums, and don’t waste any more time getting a life insurance policy. If you are looking to change your plan to a different policy, never cancel your old plan until a new one is place.
No one likes thinking about the end of their life, but taking the time to push through those feelings of fear and discomfort to choose a life insurance policy is the best way to show your loved ones you care about them and to make sure that they will be well taken care of, even after you’re gone.