Not everyone carries life insurance and some people debate if life insurance is necessary for everyone to have. While there are instances where life insurance is not necessarily practical, it is an important benefit not for the policy holder but for his or her beneficiaries.
Life insurance is sometimes thought of as being expensive, but there are choices between term life and whole life that can make life insurance very affordable. The main idea is to carry sufficient coverage for your burial and for your dependents. In a nutshell, you need life insurance if you have anyone that currently depends on you for financial support.
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Types of Life Insurance
There are different types of life insurance that cater to different needs. All life insurance policies have similar exclusions to the coverage, so be sure to read all the fine print. Here are explanations of term, whole, variable and universal life insurance coverage.
Term Life Insurance
Term life insurance is becoming a popular choice because it is the least expensive plan and provides basic no frills coverage. The amount of coverage you elect when you purchase the policy is the amount of your benefit, so if you buy a $100,000 term life policy your beneficiaries will receive a $100,000 payout.
There is no cash value involved with term life insurance as there can be with other policies, but the premiums are usually the lowest you will find by far. You can select different terms of coverage, such as 10 years or 20 years and your premium will change based on the term you choose.
The only downside to term life insurance is, ironically enough, your survival during the term elected. If you do not die during the term you choose, then there is no death benefit payout and your premiums are very simply gone. The positive side to this, of course, is that you’re still living and you can buy another life insurance plan!
Whole Life Insurance
Whole life insurance costs more money than term life insurance; but, it provides lifelong protection, literally. Once you purchase whole life insurance, you have the policy for life and your beneficiaries will benefit from the policy payout. Typically, whole life policies are based on a fixed rate, which means you will pay the same rate for the entire time of the policy. They usually also accumulate cash value which can then be paid out in dividends or applied to your account as a payment against your premium. Although the policy is intended for life, you always have the option of canceling your policy at any time.
Variable Life Insurance
Variable life insurance is similar to whole life insurance except that it has some flexibility in the cash value account. This type of policy is geared more for someone with a higher risk tolerance because the returns on the cash value account can actually alter the death benefit payout. The final benefit could be higher than the initial coverage but it could also be lower. With a variable life insurance policy you are also allowed to borrow against it if needed.
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Universal life insurance is similar to whole life insurance but has added flexibility. In addition to adding cash value to your policy, it allows you to borrow against your account when needed. The account for your cash value earns market rates, which provides a lower risk but offers a higher potential for return. Universal variable life insurance is similar to universal life insurance but it allows you to invest your cash value account in various funds, such as stocks and bonds and the money market. This type of account usually has larger premiums, but you are allowed to borrow against your policy if needed and you can cancel it at anytime.
Who Needs Life Insurance
When deciding if you should purchase life insurance, you should first consider its primary purpose. Life insurance provides no direct benefit to the policyholder, since it is only paid out upon the death of the policyholder. Therefore, the intent of life insurance is to provide financial benefit to those listed as beneficiaries on the life insurance policy.
Funeral and burial costs average approximately $15,000 to $20,000, and if you don’t have funds put aside for this cost, someone in your family will most likely need to accept the burden of these expenses. For this reason, many people suggest that everyone should have at least enough life insurance to finance the policyholder’s funeral.
The other important question to ask yourself is: “Do I have someone who depends on my financially?” Dependents can be children, a significant other, parents, or anyone else who financially relies on you. Most people agree that the primary purpose of life insurance is to provide income to your dependents who will suddenly find themselves at a financial loss in your absence. If you provide the primary income, you need to consider life insurance as a way to provide for your family when you are no longer there to do so yourself. If you are not physically bringing home an income but you are staying at home raising your family, you need to consider the hidden financial asset of the services you are providing as well.
Determining Life Insurance Benefits
How much life insurance coverage is needed depends completely on your lifestyle and the needs of your beneficiaries. If you’re single with no dependents and you don’t have any debts, such as an upside down mortgage, you really only need enough to cover your funeral expenses. On the other hand, if you have aging parents, you may want to consider their needs as well in the event that you are not around to help take care of them.
Determining how much life insurance to purchase has a lot to do with your financial responsibility while you are alive. If you provide primary income for your family, then it is suggested that you need a life insurance policy 10 times your gross annual income. The idea is that your family will be able to survive with the same comfort level to which they’re accustomed for several years while they restructure their lifestyle. It is also usually assumed that your dependents will become more financially independent during a 10 or 15 year life span.
Some people believe you need to purchase enough life insurance to provide for your beneficiaries for the rest of their lives. The cost for the increase in coverage may be very worth the benefit and should at least be considered. To do this you need to predict your future income potential and take inflation and investment interest into consideration.
If you are a stay at home parent who doesn’t bring financial income into the home, that does not mean you do not need life insurance. It is important to consider how much financial value your time provides and what it would cost to replace it. For example, if you are a stay at home mom raising three children, you need to consider the cost of daycare, housekeeping, and cleaning because these will become expenses in your absence.
Consider your income, your debt, and your mortgage. Think about how your family will financially survive in your absence and how much they will need to make it. Other factors to consider when deciding how much life insurance you need include college planning for your dependents or even your spouse, who in your absence may need to go back to school in order to obtain a higher level job with more income. Special consideration also needs to be given to any disabled dependents who require long term care.
Life Insurance is Selfless
Life insurance is a selfless insurance policy. While it provides no benefit to you as the policyholder, it can have a huge impact on your family, friends, or even a favorite charity. If your life insurance coverage is structured correctly, your beneficiaries will be able to take care of your burial without financial hardship and also survive on the benefits for an approximate number of years. If you can afford the coverage for lifelong benefits, your beneficiaries would then be set for their own life.
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