To have a good financial standing, sometimes you have to face the things you would rather ignore. For example, death and what will happen to your finances when you pass away. However, everyone has to consider this, especially if you have a family or other dependents. This is where life insurance comes into play.
If you are reading this article, you likely understand what life insurance is generally for: It provides financial security for loved ones in the event of your death. However, you may be surprised to learn that it can cover more than that. In fact, it may be a good idea to get life insurance even if you are the only person you financially support.
What is life insurance, exactly?
Life insurance is designed to protect your loved ones financially in the event of your death or to provide a safety net if you live beyond the policy period. By ensuring that your financial obligations are taken care of, life insurance allows your loved ones to focus on their lives without worry.
These are the three main types of life insurance.
- Term life insurance protects you for a specific amount of time. If you were to pass away during that time frame, your beneficiaries would be taken care of- however, once that term is up, the policy expires. You do have the option to renew it, but it would come at a higher monthly price. A lot of people choose “level” term life insurance, which means that the monthly premium would stay the same throughout the entirety of the term.
- Whole life insurance is a type of life insurance that covers you for your entire life. It is usually more expensive than term life insurance, and the payments are often fixed. The premiums for whole life insurance go towards the policy’s cost and build up a cash value over time. This cash value can be borrowed against and may even pay dividends, depending on the company.
- Universal life insurance is another type of permanent life insurance; it has features for both term life insurance and whole life insurance. The policy’s cash value grows in a tax-deferred savings account. You can borrow against the cash value of the policy. The premiums, just like term life insurance, are flexible and will probably increase as you age.
Do I actually need life insurance?
As you may be thinking, this process may seem more complicated than you have the capacity for, and you may wonder if you really need to do this or if it can wait. I understand that it can be discouraging to plan for a future financial situation that you will not be around to see, but it is important.
If any of these criteria apply to you, it is worth considering.
- If you have children or other people who rely on you financially. You probably know that life insurance is for people who want to ensure their children or spouse are taken care of after death. But life insurance can also be used to help cover the needs of other dependents, like siblings, parents, friends, or even pets. It can also be used to help pay for big expenses like college, living expenses, or mortgage payments.
- If you don’t have much money saved up, you may be putting a burden on your loved ones when you die. Truthfully, funeral and burial expenses can be expensive, averaging around $7,000–10,000 in the US. You can get life insurance to ensure your memorial costs are covered.
- If you have private student loans or any type of loan with a cosigner, it’s important to know that many private loans are not forgiven upon the borrower’s death, unlike federal student loans. If you die before paying off a private student loan, your estate will be responsible for the balance owed. This means that your loved ones could end up with nothing after you die. A life insurance policy can help ensure that your debts are paid off so that your beneficiaries don’t have to worry about them.
- If there is a history of a life-threatening disease or illness in your family, it is important to do your research as soon as possible. If you wait until you start showing symptoms, your insurance premiums will be much higher if you can even get coverage. One positive aspect is that you can start estimating any expenses that might occur. Hospital bills, funeral costs, and other expenses can add up after a person passes away. Life insurance can help cover those costs.
- If you’re a business owner. What will happen to your business if something happens to you or your employees? How will your clients and partnerships be affected? A life insurance policy can provide financial protection for your business in the event of your death, disability, or other unforeseen circumstances.
- If you have a large estate. If you have a lot of property that will need to be divided after you die, a life insurance policy can help cover the cost of carrying out an estate plan.
In short, life insurance can be used to pay for a wide range of expenses in the event of your death. This can provide peace of mind for loved ones by ensuring they will not have to worry about financial matters while grieving.
Is there anything I should know about life insurance before taking out a policy?
No matter what policy you choose, most life insurance companies will require a medical exam to help them calculate your premiums. This is based on your physical health. Even though this process can be very intrusive, it is important to be honest with the provider, as they will cross-reference your application and exam with your existing Medical Information Bureau file.
Here is some advice: If you are considering having children and a uterus, get a life insurance policy before you get pregnant or give birth. Wait a few months so your body can go back to normal. Insurance companies will look at things such as your weight and blood pressure when calculating your premium, which can be different when you are pregnant. Being pregnant at the time of the exam can make it, so you have to pay more for insurance in the future.
How much life insurance should I get?
A few methods can be used to determine the amount of money your life insurance policy should be worth. The most common way is to:
- Your salary: The most common way is also the quickest and simplest way, but it is accurate for most people – just multiply your current salary by 7-10 times.
- Capital needs: What are all the expenses you are dealing with currently? How many years of income do your beneficiaries need to replace what you earn? Also, consider how much you want to set aside for your loved ones’ education. Are there any debts that need to be paid off? If you do unpaid work like childcare, cooking, cleaning, or landscaping, how much would your loved ones need to pay someone to do that work if you weren’t around? Finally, how much will your funeral and burial cost? Add all of these items to the total.
- Human life value: I don’t mean the value of your life (which is priceless), but the value you’d bring in over the course of your life: Calculate your income (including the value of unpaid services you perform for your family) from now until retirement and subtract the 20-40% you would pay in taxes.
How do I choose a life insurance policy? What should I be looking for?
When it comes to life insurance, there are many options to choose from, each with different rules and criteria. Comparing policies side-by-side can help make the decision process easier. Talking to a financial advisor will help a lot as he/she can provide resources and advice that are insightful enough to guide you in making the right life insurance choice based on your specific needs and circumstances.
Making a life insurance decision can be difficult and unpleasant, but it does not need to be complicated. familiarizing yourself with all of your choices will allow you to have power over the process. As with all other decisions about your financial well-being, you will feel much better once it is complete – both for yourself and the people and pets you care about.
Should I have life insurance when or after I retire?
There are mixed opinions, some people believe you’ve accumulated enough assets to cover costs and do not need the insurance. Look at this on a case-by-case basis. Some other life insurance policies, such as an index universal life policy, a hybrid policy with a life insurance benefit, a long-term care rider, and a cash value that allows you to take out money later in retirement. This could be an important component of your retirement plan. Discuss with a retirement advisor licensed in both insurance and investing to get the best balanced opinion as you approach retirement.