Affordable Life Insurance Protection for Your Family
Life insurance is part of your estate plan to provide financial security for your family. If you have loved ones who depend upon you for financial support, you need life insurance protection.
A life insurance policy allows your beneficiaries to cover their living expenses after your death. The death benefit from your insurance plan can provide your family with the needed funds to maintain their lifestyle and pay for monthly bills.
Depending on the size of the death benefit you want to provide and the amount you can afford to pay in premiums, you can choose from several different types of life insurance policies.
Calculating How Much Life Insurance You Really Need
Decide Whether or Not You Need Life Insurance Protection – If you have anyone who relies upon you for financial support, then you should buy a life insurance policy.
You may be able to purchase life insurance coverage through at work through your employer. But the coverage may not be high enough to meet your needs, and it likely only remains in place while you are still employed, not if you leave your current employer.
Depending on the amount of coverage you need, you may need to purchase an additional life insurance policy outside of the coverage provided at work.
If you are single with no dependents, you probably don’t need life insurance.
However, some people in this case purchase a small life insurance policy. This would allow loved ones to pay for your final expenses such as burial and funeral costs.
Estimate Your Family’s Current Monthly Living Expenses – If you are responsible for providing the money to pay for some or all of your family's living expenses, you will want to buy a life insurance plan to cover this amount so that your family can live without financial difficulties after your passing.
Add up your take-home income over a year and then multiply that number out for a number of years to determine an insurance amount to purchase; for example, 7 to 10 times your annual income.
This time period is not set in stone and will depend on how much coverage you want to purchase and how much will make you feel that your family could live safely in the event of your death.
Another consideration is the cost of child care. Upon your death, a stay-at-home spouse may be required to go to work, which would also require them to pay for child care for your children. Add in this expense to your total amount of insurance needed.
Add up your debt balance. Determine how much money it would take to keep your house – the amount you currently owe on your mortgage loan. Also, add up any unpaid debt in addition to your home mortgage.
Your family will be responsible to pay off your car loan, student loan and credit card debts. Add in your final expenses – burial and funeral costs. Your family will have to pay your medical (hospital) bills and funeral expenses, and they may need to pay estate taxes, too.
For Example: Suppose you owe $150,000 on your mortgage, and you have other consumer debt that adds up to $20,000. Estimate that your final expenses will cost around $7,00. This adds up to $177,000 ($150,000 + $20,000 + $7,000 = $177,000 )
Consider Your Child's Education – You want to leave your family with enough money to cover any future money obligations.
For Example: your spouse may want to send your children to college. Estimate how much money would be needed for tuition, books, fees and room and board per child.
If you pass away, this might not be possible without your income. A life insurance policy can make it a reality by providing a death benefit which takes into account the cost of college.
For Example: If you want your children to attend an in-state, four-year public college, you will need at least $130,000 per child.
Add Up the Current Total Financial Resources of Your Family – Tally up any financial resources still available to your family after your death.
For Example: Your spouse may have an income. You may have savings, checking accounts, CD’s, 401K accounts or other retirement accounts.
In addition, you may have begun saving for your child’s college education. Also, you might have other life insurance policies you already own. Add up the balances in all of your accounts.
For Example: Suppose you have $80,000 saved in your retirement accounts and $15,000 saved for college. Also, you have another life insurance policy through work that’s worth $75,000. That means you already have $170,000 in financial resources ( $80,000 + $15,000 + $75,000 = $170,000 )
Calculate How Much Life Insurance Protection You Really Need – Add up all of the expenses you want to cover, including paying off your house, paying off your debt and sending your children to college.
Add up all of your financial resources, including your retirement savings, checking accounts, CD’s, 401K’s, college savings and other life insurance policies.
Subtract the value of your financial resources from the total future expenses you want to cover. This amount is how much life insurance you actually need based on your current situation.
In the above example, you want to cover $177,000 in debt and $390,000 in college tuition. This totals up to $567,000.
You already have $170,000 in other financial resources.
You need to purchase $397,000 in life insurance ($567,000 − $170,000 = $397,000)
Use an Online Life Insurance Needs Calculator – Many life insurance companies have online calculators available that will help you figure out how much life insurance you really need.
You enter in how much outstanding debt you currently have and how many children you need to put through college.
You also input information about the total annual income of your family and any income you expect your spouse to earn after you die.
Then you click on a button to submit the information, the calculator analyzes your information and tells you exactly how much life insurance you really need to purchase to meet your specific needs and accomplish your future financial goals for your family.
Understanding Life Insurance Plans
Compare Term Life and Whole Life Insurance – These are the two basic types of life insurance policies available.
Term life is good for a specific period of time up to 30 years, while whole life insurance is good for your entire lifetime if you pay the premiums on time.
Term insurance is much less expensive compared to whole life. This is because term insurance is only a death benefit upon your passing, while whole life provides a death benefit and builds some cash value inside your policy over time.
Whole life policies set aside a portion of the premiums you pay each month to be invested and grow in value over time.
Term insurance is Inexpensive and Easy-to-Understand. It is good for a specific amount of time. For example, your term life policy may cover you for 10, 15, 20, 25 or 30 years. If you die during the term (duration) of your insurance, your beneficiaries get the death benefit payout from your insurance policy. If you die after the policy term ends, there is no payout of any benefits.
Whole life policies are also known as Cash-Value Life Insurance policies. They provide coverage until you stop paying your premiums. They do not expire after a certain number of years. Also, they have an investment component attached to your life insurance policy. This means that part of the premium you pay is invested by the insurer and earns interest. Three types of whole life insurance are whole life, variable life and universal life.
Life insurance policies should provide enough of a death benefit to provide financial support to your family in the event of your death. While having a cash value policy that grows over time sounds attractive, this option can be very expensive. If you would be struggling to pay the premiums on such a policy, then term life may be the best option for you and your family.
Evaluate the Two Types of Term Life Insurance – You can choose from two different types of term life insurance.
The first is the Annual Renewable Term. With this type, you can purchase one year of coverage at a time. You have the option to renew each year.
The other option is Level Premium Term. This means you lock into a specific multi-year period, such as 10, 20 or 30 years.
With annual renewable term insurance, your premium payment amount will increase each year.
With level premium term life, you are guaranteed the same premium for the entire duration of the term up to 30 years.
Compare the Three Different Kinds of Permanent Life Insurance You Can Buy – They are whole life, universal life and variable life. These policies use different kinds of investment tools to grow cash value.
The rate of return, which grows cash value, depends on the risk involved in the investments. Policies with higher-risk investments do not guarantee an amount for the cash value of your policy (though the death benefit is always guaranteed).
Whole Life Insurance pays a guaranteed amount death benefit to your beneficiary upon your death. Part of your premium is invested by the insurance carrier to grow the cash value of your death benefit. The fund grows tax-deferred each year that you keep the policy In Force.
Universal Life Insurance combines a life insurance policy with a money-market investment. This type of investment is riskier. Therefore, policyholders can expect a higher rate of return on their money.
With Variable Life Insurance, the insurance policy is tied to a stock or bond mutual fund type of investment. The cash value account is invested in several sub-accounts. The investment grows or shrinks along with the performance of the mutual fund accounts in the market. The Beneficiary of your life insurance policy will enjoy favorable tax treatments.
Universal life and variable life may offer higher returns than whole life insurance policies, but they don’t offer the guarantee that comes with whole life plans. There is a risk that the rate of return will not be as high as expected.
These choices differ primarily in their fixed and variable rates of interest depending upon the investment vehicle chosen for your policy. In each case, the policyholder pays a premium in excess of the actual mortality risk of the insured person.
Finding The Best Life Insurance Plan
Assess the Reputation of the Insurance Company
Insurance providers are rated for financial strength and reputability by a handful of financial strength ratings firms. These ratings firms are A.M. Best Company, Standard & Poor's, Moody's and Fitch. Not every insurance carrier will have a rating with all rating agencies, but it’s important company.
Firms assign ratings on different scales, with some using "A+" to denote their highest rating and others using "AAA."
In general, an assessment of "secure" (rather than "vulnerable") is a positive indicator of insurer financial performance.
Choose Between Term Insurance and Mortgage Protection Insurance When You Buy Your First House – When you purchase your first house, it is probably time to consider purchasing a term life insurance policy. This allows the co-borrower on your mortgage to receive a death benefit that would cover any living expenses and to keep paying off the mortgage loan on your home.
If for some reason, you don’t qualify for a term insurance plan, you may want to buy mortgage protection insurance. This pays the beneficiary enough money to pay off the outstanding mortgage loan on your house in the event of your death.
Provide for Your Family When Expecting Your First Child – Once you and your spouse are expecting your first child, you’ll need a life insurance policy to protect your family in case you die.
Your beneficiary can use the proceeds from the death benefit on your life insurance policy to maintain the same standard of living for your child without having to worry about how to replace the loss of your income.
Choose a policy that has a large enough death benefit to pay for at least 18 years of child-rearing and household expenses. In addition, you can provide enough to cover college tuition for your child or children.
Evaluate the Annual Benefits and Premium – Compare premiums to see if you are locked into a rate for a number of years or if it varies each year. If you are on a fixed income, a fixed premium might be better for you.
Similarly, compare the death benefits. Depending on the type of policy for which you are shopping, the amount of the death benefit may not be guaranteed.
Evaluate how much the death benefit may fluctuate each year.
For Example: Term insurance plans are less expensive than permanent life policies. Their premiums are fixed, meaning you pay the same amount of premium each month for as long as you have the policy In Force.
Also, the death benefit is a guaranteed amount. Your beneficiary is guaranteed to get the amount of insurance payout you purchased.
Permanent life plans are much more expensive. Also, some invest part of your monthly premiums in order to grow the cash value inside your policy over time.
So, your monthly premium might vary. It also means that the amount of your insurance policy's cash value is not guaranteed (though your death benefit is).
It can increase or decrease depending on how well your investments perform while you are insured.
Can You Convert Your Term Policy into a Cash Value Policy?
Some insurance carriers write a clause into your term life policy that allows you to convert it to whole lifetime coverage without providing new evidence of insurability. This means that you can convert the policy regardless of your health. You don’t have to undergo a new physical exam in order to re-qualify.
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