Buying Life Insurance
Date Added: July 10, 2008 01:00:17 AM
Planning for your own death might seem like an unpalatable idea but if you have a spouse and children or family that depend on you financially, a life insurance seems to be inevitable. After all you don’t want them selling off assets to pay bills or taxes after you’re gone.
The money your named beneficiary receives (the death benefit) from your life insurance can help cover daily living expenses, pay the mortgage and other outstanding loans and ensure that your family is not burdened with debt after you die.
How much life insurance does one need?
Everyone’s needs are different but generally it depends on your financial responsibilities and income.
The whole point of a life insurance is to replace your income, so the correct way to determine how much you need would be to deduct the total income that would be lost upon your death from the total sum of your family’s ongoing financial needs, with the remainder representing annual income that your insurance will need to replace.
The death benefit amount, when invested, should provide income annually to cover this amount as well as fund one-time expenses such as college tuition for your children or paying down mortgage or debt and funeral expenses.
A life insurance policy should typically pay a benefit equal to seven to 10 times your annual income to adequately cover your needs.
It may also be a good idea to consider income replacement for nonworking spouses. Such coverage should provide for costs for day care, housekeeping, or nursing care as well as any net earnings from part-time employment.
Generally, a life insurance agent or fee-for-service financial planner can help you determine what level of protection is right for you and your family.
Term vs. permanent life insurance
When choosing the type of life insurance to go for, consider a term policy that is renewable and convertible to whole / permanent life should your needs change.
However, because insurance needs are based on income replacement and personal preferences, the decision on what insurance is right for you is usually a matter of choice.
Term life policies offer death benefits only and if you should live past the length of the policy, you or your beneficiaries get no money back.
Permanent life policies, on the other hand, tend to offer death benefits and a "savings account" (also refered to as "cash value"). If you live past the length of the policy, you get back at least some of, if not much more than, the amount you spent on your premium, by either cashing in the policy or by borrowing against it.
Because some of the money is put into a savings program, permanent life insurance premiums tend to be more expensive than term premiums. However, the premiums for permanent life will stay the same over the years whereas the premiums for term life tend to increase.
And when it comes to how much you or your family will actually get from the policy, the value of permanent life policies tend to be higher because more money has been paid in and the cash value has earned interest, dividends or both. However, this is not always true and depends on how long you keep your policy, your age, health, insurance company, the types of policies chosen, interest and dividend rates, and more.
Take a moment to learn more about Filing a Life Insurance Claim.
