If you’re in the market for a life insurance policy, you may be a little overwhelmed by the choices available. If you’re confused by the terminology or unsure what type of policy you need, the following information should help.
Here are some basic steps to finding the right life insurance policy for you.
Step One: Determine if you need life insurance.
Not everyone needs life insurance, but many people don’t realize they could benefit from having it. If you have family members who depend on you and your income for support, then setting up a life insurance policy is a good way to make sure they’re taken care of in the event of your death.
Another good reason for life insurance is to take care of any medical costs or funeral expenses associated with your death. If you don’t have cash for this purpose saved up anywhere else, then a life insurance policy may be a good idea.
Step Two: Determine how much coverage you need.
The easiest way to calculate how much life insurance coverage you should have is to estimate how much income your beneficiaries will lose if you pass away. A standard way to measure the amount needed is to assume that your family will need a two-year cushion in order to recover from your death, and to make sure your policy can support them for those two years.
Calculate all expenses your family will have during a two-year period, including funeral costs as well as everyday costs such as mortgage payments, college expenses, and food. If you have a working spouse or family member, subtract the amount of their income from the total expenses. The remaining amount will give you an idea of how much coverage you should have. You may find that the amount is close to how much you would make working at your job for two years; you should count on having a little extra just in case emergencies might arise.
Step Three: Choose your policy.
There are four basic types of life insurance policies. They’re outlined briefly below. Choose the one that best fits your situation.
- Term life insurance.
Term life insurance is the simplest and most common form there is. With term insurance, you are covered during a specific term or period of time, for as long as you are paying the premium. If you stop paying during your lifetime, your coverage ends. In the long run, term life insurance is the cheapest option and is ideal for those who choose to invest their money elsewhere, such as in retirement funds or stock.
- Universal life insurance.
With a universal life insurance policy, you are allowed to choose how your money is invested. Universal policies are a hybrid, combining the basics of term insurance with cash values and investments. You can adjust your premiums and death benefits during the course of the policy, and a portion of the amount is set aside as cash value. As the policyholder, you may redeem this cash value during your lifetime.
Keep in mind that after you reach age 60 the mortality expense of the policy will rise, sometimes drastically, which could result in losses in your investment account or a much higher payment.
You should also note that if you die before cashing out the value of the policy, your beneficiaries will not receive that money. They will only receive the face value of the policy.
- Variable life insurance.
Very similar to universal life insurance, variable policies differ only in one major respect: they offer a wider selection of investment opportunities, including stock funds. It is also possible with a variable life insurance policy for beneficiaries to receive the cash value of the policy as well as the face value in the event of your death. Variable life insurance can be somewhat riskier than universal; hence the higher possible payoff.
- Whole life insurance.
Whole life insurance is similar to term insurance, but does not operate within a specific set period of time. Rather, it covers your “whole life.” The insurance company generally invests a portion of your money, and some companies pay out dividends to policyholders.
A major advantage to whole life insurance is the fact that you pay a fixed premium for as long as you own the policy. You do have the option of withdrawing from the cash value of the account during your lifetime, but you may be charged fees for doing so.
Step Four: Find a company.
Once you know what type of life for insurance will work best for you and how much coverage you need, you’ll have to find a provider. This is a fairly complicated process, as many companies offer rates and restrictions that vary widely from the competition. Be prepared to shop around and locate the company that gives you the best deal for your money.
Remember that while the rate you receive is important, it’s not the main reason you should choose a specific provider. Keep in mind that this company is going to be in charge of taking care of your loved ones in the event of your death. It’s essential to choose a reputable company that you trust with this responsibility.
Life insurance is designed to give you peace of mind. Make sure you educate yourself on the available options, and that you’re comfortable with your final decisions.
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