Choosing the right life insurance is essential to making sure your loved ones are taken care of in the event of something happening to you. Not all life insurance policies are completely the same, however, so oftentimes, you need to know how to make the most of your coverage.
Understanding the Basics
There are a variety of terms involved with life insurance that may be unfamiliar to you and can mean the difference between getting the most out of your plan and drowning in confusion.
Terms are how long your policy lasts, with these lasting anywhere from five to 30 years. The death benefit is the amount paid out in the event of your death; these generally fall between $25,000 to $10,000,000 and are paid out as a lump sum tax-free. Beneficiaries are those who receive the death benefit; they are listed on the policy but can be updated on an as-needed basis.
Premiums are what you pay for your policy; this is usually paid monthly (although discounts exist for those paying annually depending on the provider), isn’t changed once the policy is in-force, and is determined by how likely it is for you to pass over the term. The process of underwriting is when the policy provider determines how likely it is for you to die during the term; this occurs after you apply and your premiums are determined during the process, based on factors like health history, current health, and more.
Before you go about buying a policy, you should make sure that two facts are upfront and immediately clear: whether you actually need insurance and how much coverage you actually need.
While everyone does need life insurance at one point or another, it isn’t a good idea to just buy a policy arbitrarily. Policies are a huge investment and understanding whether or not you need one can have a considerable effect on everything else concerning it. Despite the name, life insurance can actually be used for a variety of life’s other financial commitments, such as paying off mortgages, funding retirement, help in estate planning, and a dozen other things.
Additionally, even if you don’t have to worry about things like that you can always purchase what’s known as a “starter” policy, which is smaller than standard policies and less expensive. That way, it both doesn’t cost you too much, yet you have a policy when you need it, along with being able to upgrade later on.
It’s also equally important to determine just how much coverage you actually need; too much and the policy becomes expensive, while too little means nothing really left for your loved ones. Online calculators are incredibly helpful in this regard, although there are other methods that can also give you a good rough estimate.
If you’re looking for something more exact and detailed, then a good way to start is first adding up the monthly expenses your family will go through after you’re gone; this should also include one-time expenses like funeral costs alongside longer term ones, like school bills or a mortgage. Once you have this total, divide it by .07; this represents the lump sum, which earns around 7% annually to pay for these future expenses. The result is then added with the amount you’ll need for one-time expenses, wherein you’ll have a rough estimate of the insurance amount you’ll need.
However, it’s very important to keep in mind that both the above method and online calculators can’t give you any definite final answers. They can give you a greater education and more comfort in dealing with the basic workings of life insurance, letting you be better prepared when it comes time to choosing a proper policy.
Types of Life Insurance
As buying life insurance is a large investment, it’s important to understand the different types available to you; the vast majority of policy providers offer these types.
Term life policies cover you for a defined period. Once said term ends, the coverage also ends unless you decide to renew. Most policies of this type provide what’s known as level term coverage; this means that the policy’s value doesn’t change across the term.
These are the most affordable types of life insurance, as they only require you to pay a flat monthly rate, which can be helpfully paid out using auto payments. Term life insurance is perfect if you’re young and starting a family.
Whole life policies involve a fixed death benefit and coverage from the time you purchase the policy until you die. A set premium is paid on a scheduled basis. These policies build cash value unlike term life types, with the value based on a parameter set by the provider. Once matured, you’re able to take out a loan or cash out a portion of the policy’s value if you drop the coverage.
Whole life policies are most ideal if you’re on your own and your kids have left home, providing your spouse with a death benefit in case of your passing. They also work well if you’re an adult buying for an ageing parent, which can help protect them in their old age or help offset the costs of assisted living.
Universal life policies are a modernized form of whole life insurance. Unlike whole life policies where the face value is fixed, with universal life policies, you’re able to increase the death benefit at a later date as long as you pass a medical exam. These types of policies are ideal with their flexibility, allowing you to change your premiums after the policy matures; they also provide an investment feature. The same benefits mentioned earlier for whole life policies also apply for universal policies.
Knowing the Financials
As with anything financially based, there are different aspects to life insurance that can ease the financial burden of having the policy; they let you breathe easy while still getting the most out of the policy’s benefits.
While not suited to everything financial, setting up automatic payments for your life insurance is actually one of the best ways to pay, especially if your premiums remain the same; these can take the form of automatic bank drafts or credit card charges, it’s completely up to you. The reason automatic payments work so well and are so important is the fact that, if you’re paying manually and miss a payment, your policy could be cancelled. This also means that the policy provider may not pay back missed premiums and they don’t have to reinstate your policy.
Additionally, try to stay away from “simplified issue” policies unless absolutely necessary. These types of policies involve few application questions and no exam, but also come with the caveat of a two to three year waiting period before they’ll pay out all of your death benefits; this isn’t ideal if you want life insurance immediately.
If you’re looking for life insurance as a means of investment, both whole life and universal life policies should be your go-to. While the former builds cash over time, the latter does the same with potentially higher dividends. Variable life policies are another great investment tool, as they feature a death benefit and savings account alongside letting you decide how to invest your savings; however, these carry more risks, as a bad investment can reduce both it and your death benefit.
Rhett Desormeaux is a content writer currently working with BreezeMaxWeb. He’s a passionate writer and loves studying ancient history, especially Bronze Age civilizations.