Life Insurance - Who Needs It
If you've ever had the nagging feeling that your family would be better off without the burden of caring for you, you're not alone. There's a lot to consider when contemplating life insurance (especially if you have a spouse and/or children), but it's a necessary evil: in case something were to happen, then your loved ones would at least be financially provided for. We're here to help! This post will walk through all sorts of things about life insurance, from what should be on your policy (and what shouldn't) to how much coverage is enough. It's rated PG-13, but we'll include some words of advice that may not be suitable for kids and/or those faint of heart. So, in no particular order (because that's how life insurance works), here are a few things you should consider before buying a life insurance policy.
Posted by Kevin McCallister on 11/28/2014 10:43:00 PM
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Let's Talk About the "Life" of Your Life Insurance
Life insurance is a great way to make sure that your family is provided for in the event of your untimely death. But what type of life insurance should you get? The following are the most common life insurance products, so let's take a look at each one and see which one is right for you. Term Life Insurance Our first type of life insurance is called "term," also known as temporary, or level term (as opposed to decreasing or increasing term). When you buy this type of life insurance, you are paying a premium for a specific amount of time--your "term." When that term is up, your coverage ends automatically.
Life insurance is great because it protects your family from financial hardship if something were to happen to you. But sometimes, life insurance can lead to financial hardship--especially when it's sold as part of an investment that goes bad.
Term life insurance is most often used to provide death benefits for a certain period of time. For example, if someone has a 20-year term policy and dies after 3 years (the first 17 years are covered, but not the last 3), then the beneficiary will receive a payout for the 18 remaining years (or until age 65). The payout is based on the death benefit stated in the policy.
Most term life insurance policies cover a specific age. However, it may be possible to buy term life insurance that extends beyond the age that you would typically die (i.e., over age 85). That being said, the longer your policy is going to be in effect, the more expensive it becomes. Whole Life Insurance This type of policy is like term insurance with a twist--it doesn't have a set expiration date. Instead, it builds up a cash value for you (and your beneficiary) over time as you make extra payments on top of your premium costs. Whole life insurance is most often used to provide permanent death benefits.
The cash value portion of a whole life insurance policy can be used in several ways: it can be used for money to pay off debt, or it could be used as a source of income for retirement. However, many people find that they simply spend money from their cash value account over the years without ever saving any of it. For this reason, we recommend that you not take out a whole life policy unless you plan on keeping it until you die--otherwise you'll likely regret paying for something and then not maximizing its potential benefit.
Life insurance is great because it protects your family from financial hardship if something were to happen to you. But sometimes, life insurance can lead to financial hardship--especially when it's sold as part of an investment that goes bad. Whole life insurance is most often used to provide permanent death benefits.
Most whole life insurance policies allow you to cash in your policy and get paid out what the cash value is at the time of your death. However, this usually comes with a penalty fee built into the cost (they charge extra so that they can continue to pay for the policy). This means that you shouldn't be too eager to cash out your policy if you end up in a financial pinch--all of the money that you receive will be taxed as ordinary income. If possible, it's advised that you borrow money from other sources instead. Variable Life Insurance This type of policy is similar to whole life insurance, except that it allows you to adjust predefined percentages between your death benefit and your cash value. For example, let's say that you want to build up a cash value for your heirs. You could have a policy that pays out 5% of the death benefit as cash every year, and the rest goes towards building up your cash value (which can be used to pay off debt).
You can choose to have a fixed percentage or opt for an amount of changeability--either will work fine. So, we recommend that you think about a policy that will suit your needs as best as possible. Do you want to build up cash value? Or do you want your death benefit to be larger than what you would be able to get from a term insurance policy?
The easiest type of life insurance to understand is term life insurance. If that's what you need, then we suggest buying term life insurance (especially if it's offered with an investment option, or if it's offered in the group of companies where our parent company is invested). It may turn out not to be the best option just for how long the policy lasts--but this is usually impossible to predict.
Life insurance is great because it protects your family from financial hardship if something were to happen to you. But sometimes, life insurance can lead to financial hardship--especially when it's sold as part of an investment that goes bad.
The biggest thing with this type of life insurance is figuring out what's the best way to maximize your policy options for when you are alive, and how much cash value should you have built up at the time of your death? One strategy may be better than the next--but it will mostly depend on your individual situation and goals.
Conclusion
Life insurance is a great way to help your family get through difficult financial times. However, you should make sure that any life insurance you purchase isn't just helpful to them--it's also helping you achieve your financial goals.
If you want to improve your life insurance situation, the first thing we suggest is not doing anything drastic (like giving up all of your policies). Instead, we recommend taking a look at the life insurance embedded in your investment accounts (you can see ours here ). If there's any in there that doesn't confirm with what you want, then consider taking it out and replacing it with term or whole life coverage instead.