Life insurance is something everyone should have, but people often put off making decisions about it until it’s too late. No one enjoys thinking about life insurance, but it’s important to be aware of what factors to consider when purchasing it.
The purpose of life insurance is to protect the beneficiaries of the policy owner. When your time comes to an end, you’ll leave behind expenses that need to be covered and loved ones that may need financial support. A policy’s death benefit is designed to provide a form of compensation to replace your income for anyone who depends on it and provide money to pay off any expenses or debt you leave behind.
Here’s a brief overview of what you should know about life insurance.
How Long Should My Life Insurance Coverage Last?
If you’ve never purchased a life insurance policy, you may not realize you have more decisions to make than simply choosing an amount you’d like your beneficiaries to receive.
Typically, a term life insurance policy is for 10, 20, or 30 years. The term life policy you choose needs to last as long as your outstanding debts and financial obligations. The term length of your policy should be based on how much you can afford, how much you qualify for, and how much you need.
Factors to consider may include the upbringing of a child or the remaining time left on paying down your mortgage. For example, if your children are young and you’re a new homeowner, you’ll likely need more coverage than a pre-retiree who outright owns their home.
If your term life insurance policy comes to an end before you pass, your beneficiaries will not receive the death benefit. In this case, you’d need to purchase a new policy or, if the policy allows, possibly convert your term life into a whole life insurance policy.
Keep in mind, if you need to purchase a new policy when you are older, the premiums, which increase each year substantially as you age and when your health changes, may become unaffordable. Life is always changing; it may be prudent to buy more than you think you need while you are younger and while it’s less expensive. On the other hand, if the term turns out to be longer than you need, you can always cancel your policy.
How Much Life Insurance Do I Need?
Simply put, you need enough life insurance to cover your obligations after you pass. When determining the amount, you should start by looking at your existing financial needs and resources. Calculate your long-term financial obligations and then subtract the assets you own. Life insurance should be enough to fill the gap that remains.
Working with a financial advisor or using an online calculator can help you pinpoint your needs more accurately but using some common rules of thumb will put you in the right ballpark. One method is to multiply your income by ten and add college expenses for your kids. For a more well-rounded view, use something called the D.I.M.E. formula — add up your Debt and final expenses, Income for the number of years that it will need to be replaced, Mortgage balance to be paid off, and Education expenses for your kids.
What Kinds of Life Insurance Policies Are There?
There are many kinds of life insurance policies to consider when determining what will be best for you. Here are the four main types:
Term life insurance is what’s suitable in most cases. These policies last for a set number of years, and if you don’t pass away within the specific policy term, your beneficiaries will get no payout.
Whole life insurance will last until you pass as long as you are current with paying your premiums. You’ll get a guaranteed rate of return on your policy’s cash value, and the amount of the death benefit remains the same. It’s more expensive than term life, but it builds cash value and covers you for your whole life.
Universal life insurance is a category of permanent life insurance with low premiums that can accumulate a cash value. The price is the minimum amount of the premium payment you must make to maintain the policy.
Group life insurance is a type of policy provided by an employer or membership organization as a benefit. Policy premiums are based on the whole group of employees or members rather than you as an individual. Basic coverage by employers is often free, sometimes with the option to purchase supplemental coverage.
You may also want to look into life insurance coverage for specific needs or situations, such as mortgage life insurance, accidental death and dismemberment insurance, or credit life insurance.
What Do I Need to Know About Beneficiaries?
First, it’s critical that you choose beneficiaries for each life insurance policy and submit the paperwork naming your beneficiaries right away. You’ll need each person's full name, address, and social security number.
Generally, your primary beneficiary should be the person or parties responsible for the financial obligations and responsibilities you leave behind. Your secondary beneficiary or beneficiaries will be those you select to receive the death benefit if the primary beneficiary is no longer living. You may also want to use this as an opportunity to leave something extra to a loved one, such as a grandchild or sibling.
Finally, don't forget to review and update your beneficiaries regularly — each year or after a major life change. In too many cases, money is left to an estranged ex-spouse, a new partner or child is inadvertently excluded, or the beneficiaries have passed away prior to the policyholder.
Buying Life Insurance
Now that you know more about the factors to consider when buying life insurance, be sure to take action, as we are never promised tomorrow. Speak with your financial advisor or broker, get the right policy in place, and be sure to read your policy carefully.
John J. Diak, CFP® is the Principal & Client Wealth Manager at Oatley & Diak, LLC in Parker, Colorado. He assists clients through many difficult lifestyle changes such as business downturns, retirement planning, divorce, the death of a spouse, and family estate issues among others. Oatley & Diak, LLC is a family-run registered investment advisory (RIA) firm that provides clients with investment management and financial planning services in a hands-on, intimate environment. Learn more about them at oatleydiak.com.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims-paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims paying ability of the issuing company.