Why You Need Life Insurance, and What to Look For
If anyone depends on you financially, you need life insurance. None of us like to think about death, and if you’re young and healthy, it may seem remote enough to make premium payments feel like a waste. As distant as the possibility may seem, though, we can’t forget that anything is possible and that getting insurance while we are young and healthy can bring real cost advantages. Unfortunately, only 44% of American households had life insurance in 2010, a 50 year low.
Life insurance assures that money will be available to your dependents if you die. A family that loses a primary breadwinner without appropriate insurance can find itself in serious financial trouble, and in many cases radical adjustments to the family lifestyle are necessary. A well-chosen policy can keep your loved ones in their home and assure a college education for your children, even if you’re not there to provide.
Pay Off the Remaining Bills
A family that is carrying a mortgage or any other significant debt can be in deep trouble when a breadwinner is lost. Even rent may be difficult to pay, especially if a surviving partner has child care responsibilities. Medical bills can also be a huge problem: there is often a period of hospitalization or nursing care before death, and s prolonged period of health care can come at a very high cost. A life insurance policy can provide enough money to pay off all of the medical bills, and still leave enough money behind to support a family. Funeral expenses also have to be paid: the typical cost for a funeral with a casket and burial runs at around $6,500. Because payments are usually made quickly, the money from it can be used to pay for the casket, a headstone, and other funeral costs.
Pay for College
Education is one of a parent’s primary responsibilities. We all want to give our children the best possible chance at a good life, and a college education is a key part of that. College is expensive and difficult to pay for at the best of times. In a worst case scenario, would you want your children to be disadvantaged for life?
Create an Inheritance
A life insurance policy can provide an inheritance for your child or children. Many of us want to leave behind a good inheritance for our children, but do not have enough money to put savings aside, or we do not want to divide up a business or land. Your policy can provide an inheritance; one child can get the land or the business when you die, and your other children can receive their inheritance in an equal amount from your policy.
Types of Life Insurance
There are two basic types of life insurance: term and whole life. While some policies may go by other names, they all are one of these two types.
-Term Life provides coverage for a term or a set number of years. You can purchase term life for anywhere between one year and up to 30 years.
The coverage remains the same for the term. There are no bells and whistles with the policy, including any savings program. It is just insurance and nothing else, which makes the policies much cheaper than whole life and gives you much more coverage for the same amount of money.
To get the best benefits out of a term policy, be sure to get a guaranteed renewal, which enables you to renew the policy for another term, even if your health situation deteriorates. Without the guarantee, you may end up unable to get a policy if you have developed serious illness.
-Whole Life coverage comes in several variations, but all of them have two parts, insurance, and a savings plan. The insurance portion is usually level, but it can also vary under some policies. They usually last a lifetime, and if you purchase it while you are young, it is reasonably inexpensive.
The savings portion of your policy is financed by the premiums you pay each month, which makes these policies are more expensive. It will take several years before a sizeable savings amount will be available. There is a guaranteed minimum interest rate on the savings portion. Some whole life policies let you choose your investments, in others the company providing your policy makes the decisions. With some policies, the savings portion can be used to pay the premiums, once it accumulates enough money. This is called a paid-up policy.
How to Buy
The first step to buying life insurance is to determine how much coverage you need. You’ll need to assess your total financial obligations, including your mortgage and other long-term debt. You’ll factor in your family, living expenses, projected educational expense, and give an allowance for medical and funeral expenses. At the end of the process, you’ll have a ballpark idea of how much coverage you need.
Once you know how much you need, you need to assess how much you can afford to spend for premiums. Be realistic: if you end up missing payments, your policy may be useless when you most need it.
Once you know how much you need and how much you can spend, it’s time to go shopping. Talk to an agent, or better several agents. Assess the types of policy described above. Ask your agent to review the value of different polices and how they change over time, and be sure that you understand the explanation. Don’t be afraid to ask for a simple explanation! Review the offerings in detail, and select what’s best for you. You may have to make some compromises, accepting less coverage than you want or paying more than you had originally planned, but if you remain practical and assess your options carefully at every stage, you’ll get what you need. Never let yourself be pressured by an agent looking for a commission, and if you feel like you’re being pressured, consider looking for a different agent.
The best time to buy is when you are young. Coverage is much cheaper at that stage of your life: as you age, it becomes more expensive and may become unavailable if your health is a serious issue.
The Bottom Line
If you have loved ones that are depending on you to provide for them, life insurance is not an option — it is essential. There are always competing financial priorities, and many of them will seem far more immediate, but none of us can afford to ignore the long-term. We may think we can’t afford to get it, but the truth is that we can’t afford not to. Understanding the product, assessing our needs carefully, and comparing multiple offerings before making a choice can help us assure that we get the coverage we need at a price we can afford.