Life insurance is critical for anyone who wants to cover expenses or debt upon death and make the situation easier for their remaining family.
Although anyone can purchase life insurance at any age, couples under the age of 45 and families with children are often more likely to obtain life insurance.
Having the proper life insurance plan in place can ease the financial burden of your passing on your loved ones left behind. Some benefits of acquiring life insurance include:
- Paying off an active mortgage
- Eliminates any outstanding debts
- Covers any funeral or memorial expenses
- Helps to replace lost income
- Provides tuition or covers other school expenses for children
- Maintain a family business
- Provides tax-free income to beneficiaries
Even so, the options for life insurance will vary, making it vital to explore the choices thoroughly before deciding.
Crucial Considerations for Choosing a Life Insurance Policy
Not all life insurance policies are equal. So if you are shopping around, consider these three things to help you choose the right option for your needs.
- Determine how much insurance you require
- Consider your budget
- Explore the differences between term and life options
1. Determine How Much Insurance You Require
Many people underestimate how much life insurance their loved ones will need after they are gone. However, there are several ways to help determine the ideal amount of life insurance.
Multiply your annual income by 10. This method is a simple way to have a suitable life insurance policy. For example, if you make $50,000 annually, you should ideally have the policy to pay out $500,000 upon death.
Multiply your annual income with years left until retirement. This method is optimal for older individuals closer to retirement than just starting in the workforce. For example, if you make $50,000 annually and are currently 50 years old, you should have a life insurance policy that will replace your income until the retirement age of 65, $750,000.
The DIME Method (Debt, Income, Mortgage, Education). This method will provide you with a minimal amount of life insurance to cover any outstanding debts in the household, pay off a mortgage, contribute to any children’s education, and replace your income until dependants reach 18 years of age.
The Standard of Living Method. This method calculates the amount your family will need to maintain their current standard of living after you are gone and multiplies it by 20. This way, they can withdraw a 5% death benefit each year and reinvest the principle to receive a 5% return or more ideally.
2. Consider Your Budget
Life insurance premiums will need to be affordable enough to suit your budget. Some insurance policies will require more significant payments if they have higher payout amounts or are active for a longer term. You do not want to choose a life insurance policy you cannot afford and default on the payments later, as this can leave you and your family without any coverage.
Starting small is excellent if your budget cannot spare a significant amount for premiums. Then, as your income or needs change, you can re-evaluate your financial situation and life insurance requirements annually. In addition, it is relatively easy to add to an existing life insurance plan if you want to boost coverage later.
3. Explore the Differences Between Term and Whole Life Options
Many individuals will only require life insurance to help replace their income in the event of their death during their working years.
Alternatively, some people aim to leave an inheritance to their children as a legacy upon their passing. Each of these situations may call for different types of life insurance policies.
Term Insurance
Term life insurance is a policy that is active only for a specified term. For example, these options can last 10, 20, or 30 years. Once the policyholder reaches the maturity date, the policy is complete and does not require further premiums. However, there is no eligible payout if they pass away after the policy ends.
Term insurance can be comparatively less expensive than whole life insurance. However, it is not always the case. The costs will depend on age, health condition, and the term. For example, a 50-year-old who smokes with a 10-year term policy will typically pay significantly more in premiums than a healthy 30-year-old with a 20-year policy.
Whole Life Insurance
Whole life insurance is a policy an individual will pay for and hold active throughout life. Many whole life options will have a dividend option that the policyholder can use to help pay premiums or take out a lump sum loan amount if they wish.
Generally, whole life insurance policies cost more than term options because of these additional benefits and their long term.
Converting From Term to Whole Life Insurance
Sometimes your family’s financial needs change, and your current life insurance policy is no longer suitable. Some companies will have a conversion option to change existing policies from term to whole life.
If you are considering a policy that is flexible for your needs, search for a provider that offers conversion options.
The Takeaway
Life insurance is necessary to help your family in the possible event of your death. From covering debt or paying the mortgage to providing lost income and paying your child’s educational costs, life insurance is a responsible way to ensure you take care of your family.
However, deciding on the type of policy can be challenging. It is vital to consider your needs, budget, and how long you will need it to choose the best option.
