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There are 52 million American adults with household incomes between $50,000 and $250,000 who do not have life insurance.
And there is an even greater number of Americans whose life insurance policy will not pay out enough to cover their expenses past 3.6 years after their death.
If you want to have peace of mind and make sure your family is taken care of in the event of your death, you need a good life insurance policy.
Read on for everything you need to know about choosing life insurance.
How to Choose Life Insurance
Before you start shopping for the best life insurance options, you need to understand what your personal needs are. There are many factors that will help you determine how to choose life insurance that works for you.
If your salary is supporting your family and paying the home’s bills, you will want a policy that can cover these financial costs if you were to die.
If you have dependents such as a spouse, children or parents, life insurance can make sure they are taken care of when you are gone. Yes, even your parents could be dependants. If you are gone you may need to consider senior care options for your elderly parents.
Also if you have debt, you will not want to leave that to your family after your death.
Think about whether you have investments, a retirement plan or real estate that could be used to support your family when you are gone.
Also, consider whether you need coverage just until a certain point. For example, until the children are adults or the mortgage is paid off.
You should also decide if you want disability insurance in case you are living but unable to work.
Last of all, think about funeral expenses and make sure your life insurance policy covers those costs.
Choosing Life Insurance Coverage
There is no one dollar figure that is the right amount of coverage for everyone. It really depends on your debt, your income and how many dependents you have.
As a general rule, you may want to choose a life insurance policy that is worth 5-10 times the amount of one year’s salary. That way your beneficiaries have your income for 5 or 10 years after you are gone.
Think about if that would be enough to pay off the mortgage, put the kids through college or pay of your debts. And don’t forget funeral expenses.
The trick to choosing life insurance is that you want to be able to have enough coverage without overpaying. You may want to speak to a financial adviser who can look at your situation and recommend a sufficient amount of life insurance coverage.
Types of Life Insurance Policies
There are 2 main types of life insurance policies. Term and permanent. Let’s look at each and discuss the pros and cons of each.
Term Life Insurance
This type of life insurance is for a finite amount of time such as 10 or 20 years. You are insured only during the term of your policy. If you die during the term, your beneficiaries will get the payout.
During your term, you pay a set premium each month.
At the end of the term, you can renew your policy. Yet, at renewal, the premiums may be much higher than what you paid during the first term. Remember, you will be 10-20 years older and so will be a higher risk to insure.
When to Consider Term Life Insurance
Term life insurance is a good option for people who only need coverage for a limited amount of time. If you have young kids and want to be able to pay for their post-secondary education, a 20-year policy may be ideal for you.
The great thing about term life insurance is that you can select a term that suits your needs.
If you have a limited budget to pay premiums and need a large amount of coverage, term life insurance is a good choice.
Term life insurance premiums are always less expensive if you buy the policy when you are young and healthy. If you are young and only need coverage for a set amount of time, term life insurance is your best bet.
Permanent Life Insurance
Permanent, or universal life insurance, provides coverage for your entire lifetime. In other words, the policy doesn’t end after a certain time frame.
This type of life insurance is flexible. You can lower or increase your coverage amounts any time you need to. For example, as you pay down the mortgage, you may lower the amount of coverage in your policy. The premiums will also go down when you reduce your coverage amount.
Or, if your financial situation changes and you realize you need more coverage, you can do that too.
The best thing about permanent life insurance is that the premiums build equity over time. The amount you pay for your coverage builds a cash value. So while you are paying for life insurance, you are also putting money into a savings account.
That money is likely tax-deferred meaning you don’t pay taxes on those funds until you withdraw it. And, if the time comes that you can’t pay your premiums, the money in that savings account can be used to cover the premiums of your policy.
When to Consider Permanent Life Insurance
People who choose permanent life insurance are those that need coverage for as long as they live. This policy will pay whether you live to be 105 or die tomorrow.
If you want to accumulate savings at the same time, a permanent life insurance policy is the best option for you.
Note that the premiums for this type of coverage are often higher than term life insurance. Yet, they will stay the same forever, even as you age or your health deteriorates.
So, which is better term or whole life insurance? It really depends on your needs.
Compare Life Insurance Quotes
Now that you understand the two main types of life insurance policies, you can begin to gather quotes from insurance companies.
Don’t just pick the one with the lowest premium. Make sure you take the time to understand what you are getting.
Find out of the benefits or premiums change over time. Ask if there are any benefits that are not guaranteed. Do the benefits increase or decrease over time?
We hope this guide on choosing life insurance has helped you understand what the differences between types of life insurance are. That way you can choose the best life insurance option for yourself and your family.
Remember, you may want to insure children as well as adults in your family. The loss of a child can impact the parents’ ability to work.
Next, check out this blog post about the importance of family in our day-to-day lives.