Life insurance is a necessity in life, although many people still do not realize its importance. It is a topic that people are not always willing to discuss, while others simply ignore it or feel that their employer provides more than enough within their benefits package. So how do we come to determine who requires life insurance, what kind you need, and how to purchase the policy you want?
If there is anyone in your life that depends on your financial support, or if you work from home and take care of your family, then life insurance is a necessity. Senior citizens may also require life insurance, as it can protect their spouse in case retirement savings are not enough due to unpredictable expenses such as funerals or medical costs. Aside from that, individuals who possess a large number of assets should invest in life insurance to help deal with tax burdens.
Different Types of Insurance
Whole life Insurance is a type of insurance that combines savings and permanent protection. If you can continually pay the premiums, then you can lock in a premium rate for coverage for your entire life. When the policy gains value, you have the option to borrow over 80% of its value tax free whenever you require doing so.
Term insurance is considered to be the most basic and least expensive of life insurance policies. This works for people under the age of 50 and is written for a specified amount of time, which is usually between one and ten years in length. It is often renewable, but the premiums increase at the end of each term and can become increasing costly for older citizens.
Declining Balance Term Insurance is a variation of term insurance and is often matched to amortization rates of mortgages. The premium remains the same, but its value declines over time. After a mortgage is fully paid off, the policy usually expires. What makes this policy different is the fact that it rarely carries any cash value. Universal Life Insurance is relative to whole life insurance but comes with the ability to make more money off of your savings. These are flexible policies and allow the premiums to be altered in a number of ways depending upon your need. They also come with a guaranteed return, but drawbacks come in the form of sensitivity for interest rates and higher fees.
Variable Life Insurance offers premiums that are fixed and give you control over the cash value of your policy. The benefits you possess and the cash value of your policy can often be higher, but earnings on your investment are tax-free as long as you stick with the contract.
How Much Insurance Do you Need?
One of the most popular ways to decide how much life insurance you need is one based on income replacement. Basically, you use a formula that multiplies your annual income by five or ten times its amount to come up with an idea of how much coverage you require. Another common approach is to purchase insurance based on your individual needs and lifestyle.
When dealing with figures involving your income, it is important to realize that a large part of your current salary supports your lifestyle and goes to taxes. Begin analyzing your insurance needs by finding out your net earnings after taxes are deducted. Then, calculate the costs of your lifestyle including food, clothes, transportation, and so on. Once these figures are subtracted from your net salary, you have an idea of how much insurance you are going to need should something unfortunate happen.
On top of this, you will want a death benefit which can be invested and provide new income to your family ever year. Lastly, you want to consider extra for things such as college tuition and one time expenses that could come about after your passing.
Many people make the mistake of overlooking life insurance for spouses that do not work full time. It is important to have coverage should anything happen to nonworking spouses in order to cover the cost of things such as housekeeping, day care, and so on.
Life Insurance is a Smart Decision
Overall, life insurance is a very important part of a solid financial plan. The process itself involves analyzing your lifestyle, assessing your needs, and ensuring that the ones you love the most are protected. It can often be a good idea to get in touch with a financial planner or an insurance professional that can guide you into the right direction. Remember to determine how much money your survivors would need should something happen, decide whether you want a term life insurance plan or one that comes with a savings feature, and be sure to shop around for the best deal and the one that feels right. Life insurance is not something to purchase on a whim, and is an investment that you need to take seriously to ensure your family is protected in case the worst should happen.
