When you purchase a life insurance policy, you determine the amount of your life insurance policy and the type of policy you purchase.
Keep in mind that there are many different types of life insurance available. When purchasing life insurance, there are many things to consider: the type of policy you are purchasing, the amount the policy is for, and perhaps most importantly, how much life insurance you actually need.
When Should I Get Life Insurance?
You may not need life insurance if you are single and have no dependents. You may qualify for a small policy through your employer that will cover the basic burial expenses, which should be sufficient.
Once you get married or have children, you should consider getting life insurance. A life insurance policy will help protect your financial dependants and make sure they are taken care of financially in the event of your death.
Another situation that may warrant getting life insurance is if you assume guardianship of your brothers, sisters, or other dependents. Then, it would make sense to get life insurance to help support them financially if something were to happen to you.
Choosing the Right Amount
The amount of life insurance you need depends greatly on your life and financial situation. If you are single and childless, the amount offered by your employer should cover your burial expenses for your family. If you are married or have children, you should increase the amount of life insurance you purchase.
A good rule of thumb is to purchase enough life insurance so that your family can live of the interest of the payout. You will need to determine your family’s annual cost of living, and then work backward to figure out how much life insurance you should purchase.
You may also want to add enough to pay off any debts and your mortgage and to fund your children’s education.
Keep in mind that as your life situation changes, your life insurance needs will change, as well. You can use term policies to make the adjustments that you need to the amount of insurance that you carry. This can be part of your long-term family financial plan.
Choosing the Right Type of Life Insurance
Once you have determined the amount that you need, it is important to choose the best type of life insurance for your situation. There are two basic types of life insurance: term and whole life insurance. They offer different benefits.
Term Life Insurance
Term life insurance is a policy that you purchase for a certain number of years. The rates are significantly lower than whole life insurance.
You can purchase term life insurance at varying amounts for a set amount of time. Common lengths of time include 5-, 10-, or 20-year policies.
If you choose term life, you should self-insure by the end of the policy or plan on taking out a new policy. Remember, you should get a life insurance policy that will be able to support your family and would allow them continue their same standard of living if something happened to you.
Term life insurance is generally the most affordable option and it may be the best option for your family.
Whole Life Insurance
Whole life insurance is a cash value policy that you purchase and keep for the remainder of your life.
You pay a premium for this insurance and it’s the more expensive option. Whole insurance is often sold as an investment because it has a cash value and you can draw out of it or borrow against the amount when you are still alive.
Other benefits of whole life insurance include a constant premium, lifelong coverage with no future medical benefits (if you do not make a change to your policy), and tax savings opportunities.
Other types of life insurance policies include universal life, a lifetime policy with some cash value; variable universal life insurance, another type of permanent life insurance with an investment portion that can earn you higher returns, but come with more risk.
Other Tips:
- Your insurance may contact you about converting a term policy into a whole life policy, which should be avoided. In fact, you may want to switch your whole life insurance policy into a term life policy.
- If you decide to change your life insurance policy, you will likely be required to undergo a life insurance medical exam, which you will need to “pass” to get the policy.
- Choosing a life insurance beneficiary can be difficult. Consider naming a contingent beneficiary or a secondary beneficiary, and updating your beneficiaries throughout your life as your situation changes.
