Life insurance can be a heavy topic, and it is sometimes the sort of thing we don’t really think about until we actually need it. In truth, life insurance can be an excellent way to protect your loved ones financially, and it often costs less than one might think. Still, it’s an area where plenty of people have lots of questions they would like answered.
We’re going to cover some of those areas here, offering a baseline education in what you need to know about life insurance. With a bit of know how, we can remove some of the mystery surrounding life insurance policies, and help you feel confident in choosing the right policy for your own personal needs.
What Is Its Purpose?
Before we get started on how to best find and use a life insurance plan, we need to cover what exactly it is. Life insurance is a policy that you pay into, usually monthly, to cover certain costs associated with the end of life. This could mean funeral costs, as well as money for family members. If you have minor children or other dependents, life insurance could cover a set amount of financial support for them for a period of time. Life insurance can also help cover loss of income, say if you have a spouse who will be negatively affected financially by losing a recently-deceased spouse’s paycheck. Different policies will cover different things, it is not a one size fits all process, so it is key to think about what your needs will actually be for the policy you go with.
How Much Life Insurance Do I Need?
Determining the amount of life insurance you should have is a tricky process, and one of the questions most asked during the application process. And there is not really a simple answer. The amount of life insurance you need is totally dependent on you, your income, your responsibilities, and how you want to set up those around you once you are gone. A good rule of thumb is to aim for a policy in an amount that is equal to about 10 to 12 times what your annual salary is. So if you make $50,000 a year, a life insurance policy of $500,000 would be a good place to land . This formula will help cover a number of things in the event of the policy holder’s death, covering the cost of funerals, making up for the immediate loss of income, and leaving loved ones with a bit more left over. This can be invested and used to get back on their feet and set up a good financial plan for the future. It ensures those loved ones won’t just be okay in the immediate future, but in the long term as well.
How Much Will It Actually Cost Me?
Similar to figuring out how much life insurance to take out, people often want to know how much it is going to cost them. Cost of living is high, and many people don’t want to shell out more hard earned cash unless it is deemed necessary and important. The good news is, the average, reliable, basic life insurance plan should not break the bank or unnecessarily put you out. Dealing with the above mentioned numbers, a good life insurance policy for $500,000 can typically cost you in the $20 a month range. In terms of big picture items, it’s a pretty nominal fee for something that is going to payout so well in the future—just the cost of a couple of Starbucks lattes. One important thing to keep in mind, the cost of your plan is often associated with your age and your health. The younger and healthier you are, the lower the cost will typically be. And you can often get that at a fixed rate for decades. So it can make sense to get your life insurance policy set up sooner rather than later.
Understanding The Different Policy Types
Now that you have a general understanding, we should talk about the different types of life insurance policies. A term life policy deals in life insurance for a set number of years, say 20 or 30 years. After that time, you have to seek out a new policy. This works well for individuals who want to pay a lower price for a set amount of time in order to make sure they have still got that safety net while dealing with some other financial burden, like paying off a mortgage, saving for retirement or paying for a child’s college tuition .
Then there is whole life insurance, or permanent insurance. These policies are ones that you sign up for, intending to keep them in place for the rest of your life. These can cost more a month, but will cover you even as you age, if your health declines, etc. These policies are also typically more expensive because they allow you to build cash value, building up money that you can later use for a number of reasons, like long term care if your health declines or other emergencies.
Determining which of these you need will depend on your current financial standing, your age, and your long term financial needs.
Some Final Thoughts
If all of this feels a bit overwhelming, it can be helpful to keep in mind that most of the time when buying a life insurance policy you will be working with a real agent who is there to help answer all of your questions. You can shop around, price compare policies, and go over all of the smaller details with the life insurance agents. By putting in the due diligence, you can come to a decision that feels best for you and your family. It’s not a decision that has to be made in a rush, but one that should reflect careful thought and consideration.