Many financial experts consider Life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways:
- Income Replacement
For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a Life insurance policy can also help supplement retirement income for your significant other. This can be especially useful if the benefits your surviving spouse or domestic partner receives will be reduced after your death.
- Pay Outstanding Debts & Long-Term Obligations
Consider Life insurance so that your loved ones have the money to offset burial costs, credit card debts, and medical expenses not covered by Health insurance. In addition, Life insurance can be used to pay off the mortgage, supplement or provide retirement savings, and help pay college tuition.
- Estate Planning
The proceeds of a Life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.
- Charitable Contributions
If you have a favorite charity, you can designate some of the proceeds from your Life insurance to go to this organization.
Home Much Life Insurance Should I Buy?
To decide how much Life insurance to buy, you need to first figure out what your goals are when purchasing this coverage. Ask yourself the following:
- Do I want to spare my loved ones from my funeral costs and outstanding debts?
- Am I concerned that my spouse or domestic partner will not be able to continue to pay off the mortgage if I die suddenly?
- Do I have dependents who count on my income?
- Am I concerned about college savings for my children, or retirement savings for my spouse if I die suddenly?
While all situations are different, here are two scenarios to help you think through the questions you should pose to your insurance professional:
If you have children, a spouse who does not work outside the home, or aging parents who you financially support, then you have dependents. Alternatively, you may simply have a spouse or domestic partner who would be unable to pay the mortgage without your financial contribution. In either case, your loved ones will no longer have your income to help them pay the bills and maintain their lifestyle after you are gone. You will have to purchase enough insurance to provide for their future, while considering how much of your budget should be devoted to Life insurance.
Some insurance experts suggest that you purchase five to eight times your current income. While this may be a good way to begin estimating your family’s needs, you will also need to figure how much your dependents will need to pay for some or all the following:
- Cost of owning a home (mortgage, maintenance, insurance, taxes and utilities)
- College savings
- Food, clothing, utilities
- Child care
- Nursing home or elder care
- Retirement savings
- Funeral expenses and estate taxes
Your family may also need extra money to make some changes after you pass away. They may want to relocate, may have to start paying for childcare, or your spouse may need to go back to school in order to be in a better position to help support the family.
If you are young and plan to have a family in the future, you may also want to consider purchasing Life insurance now so that you can lock in a good rate.
Just because you don’t have dependents, does not mean that you don’t have responsibilities. For instance, you may be concerned with not being an economic burden to others if you die unexpectedly. You may also want to leave some money behind to close family, friends, or a special charity as a remembrance. In this case, you should purchase enough coverage to pay funeral and burial expenses, and outstanding debts and tax liabilities, so that the bulk of your estate goes to your family, friends, or selected charity.
Your insurance needs will vary greatly according to your financial assets and liabilities, income potential, and level of expenses.
Types of Life Insurance
While there a many different types of Life insurance policies, they generally fall into two categories – term and permanent.
Term Life insurance is the simplest form of Life insurance. It provides financial protection for a specific time, usually from one to 30 years. These policies are relatively inexpensive and are well suited for goals, such as insurance protection during the child-raising years or while paying off a mortgage. They provide a death benefit, but do not offer cash savings.
Purchasing Term Life insurance is like renting a home. It is a short-term solution. Monthly costs are usually lower, but you will not be building equity. Individuals who need insurance protection now, but have limited resources, may purchase term coverage and then switch to permanent protection. Others may view Term insurance as a cost-effective way to protect their family and still have money to put into other investments.
Permanent Life insurance (such as Universal Life, Variable Universal Life, and Whole Life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher. This type of insurance is good for long-range financial goals.
Purchasing permanent insurance is like buying a home instead of renting. You are taking care of long-term housing needs with a long-term solution. Your monthly costs may be higher than if you were to rent, but your payments will build equity over time. If you purchase Permanent insurance, your premiums will pay a death benefit and may also build cash value that can be accessed in the future.