Life insurance is a mainstay in personal finance. According to the Life and Health Insurance Foundation for Education, 81% of Americans say they need life insurance yet 41% have actually purchased an individual policy. The question is how do you know if you need it?
If you are responsible for providing in whole or in part financial support to another person then you probably need life insurance. In case of your death, your spouse and/or dependents will not be left with obligations they will find difficult to settle, and they’ll also be able to pay for ongoing and future expenses.
Here are questions you should ask yourself when considering a life insurance policy:
1.) Is it affordable? The premiums for life insurance can be high depending on the amount of the policy, your age or other factors. Make certain the cost to keep the policy comfortably fits in with your monthly expenditures.
2.) What type of insurance is right for me? Topics 1 & 2 below highlight the basic classifications of insurance such as Term versus Permanent life insurance. First, assess your life from a personal and financial perspective then decide which type of policy is best for your situation.
3.) How much life insurance do I need? The purpose of your policy ensures your loved ones will have the necessary financial resources to pay for vital expenses after you’re gone. If you have a spouse who depends upon your monthly income, roughly calculate how much they’ll need to maintain their current lifestyle. To do this, take into consideration their current age and life expectancy. If you’re providing insurance benefits for younger dependents, consider covering future expenses, such as the cost of education.
There are several different types of life insurance policies. Here’s a review of the most notable:
Topic 1: Term Life Insurance
Term life insurance policies are available for a set period time, usually up to 20 years. Term policies can be used to supplement existing coverage or meet a specific need at a low premium. These policies do not build cash value or offer any returns. Once the policy is expired it can be renewed or terminated.
Topic 2: Permanent Life Insurance
Permanent life insurance policies are available at a higher premium, but exist until the policy owner reaches 100 years of age. The growth of cash value is typically on a tax-deferred basis. The policy owner can borrow or withdraw funds from the cash building policy to help pay for future worthwhile expenses. At the time of the policy holder’s death, the death benefit generally passes federal income tax-free to the beneficiary.
Permanent policies are available in the following forms:
A. Whole Life Insurance
Whole life insurance generally has a guaranteed death benefit and is guaranteed to build tax-deferred cash value. The premiums remain at a fixed rate for the life of the policy.
B. Universal Life Insurance
Universal life insurance is a flexible policy that combines lower premium costs as well as cash value building. The policy holder may alter the death benefits and premium payments of the policy to fit their changing needs. The policy’s death benefit is generally federal income tax-free for the beneficiary. Also, universal life earns interest set by the insurance provider allowing its cash value to grow.
C. Variable Life Insurance
Variable life insurance allows you to allot a portion of your premium to a separate account of a diverse group of investment options such as stocks, bonds and various funds. The cash value of the policy will vary depending on the performance of the investments. Variable policies typically provide permanent protection and death benefits to the beneficiary.
This is going to take more time. Research your options online first so you know the right questions to ask before you sit down with an insurance agent. Don’t be forced into buying anything. Remember the phrase: “I have to think it over. Let me have your number and I’ll call you.”
You can shop for insurance online, too. Efinancial.com, Insure.com and IntelliQuote.com are three places to start. Just remember, cheapest isn’t always best.