Asking yourself, “Do I need a life insurance policy?” but are clueless about how they work? In this post, I cover the basics of life insurance and help you determine whether you need it.
Envisioning what would happen to your family if you were to pass is very challenging. Death is never a pleasant subject to think about.
However, there can be a lot of comfort in knowing that your family will be fine if something were to happen to you.
Getting life insurance is one of the best ways to prepare for the inevitable. But not everyone understands it or needs it.
So, in this post, I will cover all the basics of life insurance policies and their types and also help you determine if you need to get one.
What Is Life Insurance?
A life insurance policy is an agreement between you and an insurance company, wherein the company agrees to pay the beneficiaries a specified amount after death.
Getting life insurance may help you:
- Ensure that your child goes to college.
- Ensure that your debt doesn’t burden your spouse.
- Ensure that your family’s lifestyle is preserved.
However, not all insurance policies are the same. Different policies offer different perks and have some unique downsides.
What Are the Different Types?
There are two main types of life insurance:
Permanent Life Insurance
These policies are typically a lot more expensive than term insurance policies, but they cover you until death. They also tend to be a lot more flexible in comparison.
Unlike term policies, not only do permanent life insurance policies grow your wealth as you age, but they also allow you to access a portion of the funds yourself when you’re alive.
A part of your premiums is added to a cash account, which you can either invest or earn interest on.
You can borrow from your cash account, withdraw your funds, or use the interest the account earns to pay the premiums later in your life.
You also get the option to surrender the policy and trade the death benefit for the money in your account. However, the company will charge you some fees for processing.
If you’re interested in getting permanent life insurance, researching variations like whole life insurance, universal life insurance, indexed universal life insurance, and variable universal life insurance will ensure that you get the best policy.
Some companies offer variations of term life insurance policies, like convertible policies and decreasing term life policies. These have different benefits and trade-offs and are worth looking into if you’re considering getting a term life insurance policy.
Term life insurance policies are often chosen over permanent life insurance policies because they tend to be cheaper and offer bigger payouts. However, if you outlive the insurance period, no one gets paid.
However, some companies also offer 30-year term insurance policies.
Term life insurances last for a limited period, and you get to choose the term when you apply for the insurance. Typically, term life insurances cover your life for 10- and 20-year periods.
Do You Need A Life Insurance Policy?
Life insurance has a lot of benefits. However, not everybody needs it.
If no one depends on you for their well-being, and you have enough money to pay for death-related expenses and any debt, you don’t need a life insurance policy.
You also don’t need a life insurance policy if you have enough assets to provide for your loved ones after you pass.
But, if you’re the primary provider for your dependents, getting life insurance ensures that they are taken care of if something were to happen to you.
Also, if you have a significant amount of debt, life insurance is worth getting since it ensures that your dependents aren’t burdened with it.
Does Age Matter When Getting a Life Insurance Policy?
One of the most common misconceptions about life insurance policies is that you won’t qualify for one once you’re older.
You will qualify for a life insurance policy regardless of your age.
But your age makes a difference in the premium you have to pay – the older you are, the more you’ll need to pay.
How to Pick the Right Life Insurance Policy?
The first thing you need to determine is how much money your dependents would need if you were to pass.
Here’s a list of things you need to consider:
Your insurance must have enough funds to pay off your debt in full. Besides mortgages and car loans, you must also factor in your credit card debt and any other loans.
Don’t forget to factor in the interest and take the time to run the numbers, so you cover any interest or charges.
One of the biggest reasons why one would get life insurance is to replace their income.
If you’re the primary provider for your family, you must get a policy that will replace your income and payout a little extra to safeguard against inflation.
Six-to-ten times your annual salary is a reasonable amount for a life insurance policy. Some add an additional year’s salary to the policy to guard against inflation.
Another popular way to calculate the life insurance amount is to multiply your salary with the life insurance needed.
The “standard of living” method is by far the most popular method to calculate life insurance.
You start by calculating the amount of money your dependants need annually to maintain their lifestyle and multiply it by 20.
The idea here is that the dependants will take 5% of the death benefit every year. They can invest the death benefit’s principal and earn 5% or better with ease.
If you only need a small amount of coverage, it’s worth checking with your employer and enquiring if life insurance is offered as a perk.
You now know the basics of life insurance policies – a step in the direction towards knowing your family will be okay even when you’re not around.