You’ve probably heard that you need life insurance. You may have even experienced the pleasure of an online, telephone, or in-person sales experience. But, what exactly is life insurance, and why do you need it?
Basic Policies: An Understanding
These policies are a contract between you as the company issuing the policy. Under a policy, the company promises to pay a certain amount to your personal beneficiary, whom you choose, upon your death. In exchange, you agree to sen them premium payments routinely. Having the proper amount can result in increased peace of mind, since you know that the beneficiaries you choose will be taken care of financially after you die.
One of the most common reasons people buy a policy is to replace their income in the event of their death. Simply put, when a person dies and the paychecks stop, the family is often left with limited resources. Getting cash from a policy may be essential to support the family immediately after your death and in the years to come. These policies are also used to pay debts that you may leave behind, such as mortgages and credit cards.
Adequate life insurance allows your other assets to be left intact for the family, which can be extremely helpful. Many people also purchase these policies to provide for final expenses and some even use it as a discounted method to pay for estate taxes. One of the beauties is that with a very small initial premium and the stroke of a pen a very large estate can be created for your heirs.
Calculating Your Need
The amount you need will depend on a number of factors, including whether you are married, the size of your family, the nature of your financial obligations, and where you find yourself in your career. It will also depend on the financial goals that you would like to see taken care of.
For example, a younger person may not have as great a need for more substantial payments as opposed to someone who is older, with more responsibility. However, when that same young person takes on more responsibilities, such as a family or business, they may need an increased amount.
There are many online tools available on the internet to help determine appropriate coverage amounts. Often, however, the best source may be a financial professional, who can take the time to learn of your personal circumstances.
Here are the questions to ask:
1. What are my immediate needs for financial expenses such as funeral expenses, final medical expenses, debt repayment and the like?
2. What percentage of my salary do I want to make sure my family has and for what period of time?
3. How much money do I want to leave behind for special situations such as children’s education, gifts to charities, or providing an inheritance for my loved ones?
Keep in mind that your needs will change over time, so you will need to continually re evaluate the need for coverage.
If you’re into estimates, a good rule of thumb for a breadwinner has always been approximately six times annual income. As with all rules of thumb, one size does not fit all. It’s usually better to be more detailed and take the time to determine the exact amount needed with the help of a financial professional.
Another consideration: How much can you afford? Term rates have come down significantly over the past several years and insurance for a healthy person has never been more affordable.
Just as there are many makes and models of automobiles, there are many types of policies that are available. Generally speaking, they fall into two categories which we will discuss below, but the bottom line is that most people can well afford the amount they need, depending upon the policy they select.
Types of Policies
The two basic types are term life and permanent, or cash value.
Term provides protection for a specific period of time such as 10, 20, or 30 years. If you die during that coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policies generally terminate unless there is a renewal provision for a new term period – at a new price.
Be very careful; when policies are set to expire, they either do so, or, in some cases they can renew at a radically increased premium. You need to anticipate when a policy will expire.
Permanent policies provide protection for your entire life so long as you pay the premium and keep the policy in-force.
Basically, these policies develop a reserve in the early years in order to be able to fund the death benefit in later years. Should the policyholder discontinue the policy, this reserve, known as the cash value, is returned to the policy owner subject to any applicable surrender or withdrawal charge. The cash reserve can be substantial and can have compelling tax advantages if used for income later in life. But withdrawal charges can be significant, so buyer beware.