Life
insurance is part of estate planning. If you have loved ones who depend upon
you financially, you need life insurance. A life insurance policy allows your
beneficiaries to cover their living expenses after your death. Depending on the
size of the benefit you want to provide and the amount you can afford to pay on
premiums, you can choose from several different types of life insurance
policies.
Calculating
How Much Life Insurance You Need
Decide
whether or not you need life insurance. If you have anyone who relies upon
you financially, then you should purchase a life insurance policy. You may be
able to purchase a life insurance policy through your work. But the coverage
may not be high enough, and it likely only remains in place while you are
employed. Depending on the amount of coverage you need, you may need to
purchase an additional life insurance policy outside of work.
If you are
single with no dependents, you probably don’t need life insurance. Similarly,
if you have recently gotten married, unless you own any property, you may not
need life insurance.
However,
some people in this case purchase a small policy. This would allow loved ones
to cover their final expenses. These expenses include burial and funeral
expenses
Estimate
your family’s living expenses. If you are responsible for providing some or all of your family's living
expenses, you will want to buy insurance to cover this amount so that your
family can live securely after your passing. Add up your take-home income over
a year and then multiply that number out for a number of years to determine an
insurance amount to purchase. This time period is not set in stone and will
depend on how much insurance coverage you want to purchase and how much will
make you feel that your family could live safely in the event of your passing.
Another
consideration is the cost of child care. If you pass, a stay-at-home spouse may
be required to work, which would also require them to pay for child care for
your children. Add in this expense to your total amount.
Add up
your debt balance. Determine how much money it would take to keep your house, such as the
amount you still own on your mortgage. Tally up any unpaid debt in addition to
your mortgage. Your family will be responsible for your car loans, student
loans and credit card debt. Add in your final expenses. Your family will have
to pay your medical bills and funeral expenses, and they may need to pay estate
taxes.
For example,
suppose you owe $150,000 on your mortgage, and you have other consumer debt
that adds up to $20,000. Estimate that your final expenses will cost $5,000.
This adds up to $175,000
.
Consider
your children's education. You want to leave your family with enough money to cover future financial
obligations. For example, your spouse may want to send you children to college.
Estimate how much would be needed for tuition, books, fees and room and board.
If you pass away, this might not be possible without your income. A life
insurance policy can make it a reality.
For example,
if you want your children to be able to attend an in-state, four-year public
school, you will need to have at least $130,000 per child. If you have three
children, you would need $390,000.
Add up
the current financial resources. Tally up any financial resources still available to your family after
your death. For example, your spouse may have an income. You may have savings
or retirement accounts. In addition, you may have begun saving for college.
Also, you might have other life insurance policies. Add up the balances in all
of your accounts.
For example,
suppose you have $75,000 saved in your retirement accounts and $10,000 saved
for college. Also, you have another life insurance policy through work that’s
worth $50,000. That means you already have $135,000 in financial resources
.
Calculate
how much life insurance you need. Add up all of the expenses you want to cover, including paying off your
house, paying off your debt and sending your children to college. Add up all of
your financial resources, including your retirement savings, college savings
and other life insurance policies. Subtract the value of your financial
resources from the total expenses you want to cover. This tells you how much
life insurance you need.
In the above
example, you want to cover $175,000 in debt and $390,000 in college tuition.
This totals up to $565,000.
You already
have $135,000 in other financial resources.
You need to
purchase $430,000 in life insurance
.
Use an
online life insurance calculator. Many life insurance companies have online forms that will help you figure
out how much life insurance you need. You enter in how much outstanding debt
you have and how many children you need to send to college. You also input
information about the total annual income your family would need and any income
you expect your spouse to earn after you die. Once you submit the information,
the calculator analyses your situation and tells you how much life insurance
you need to purchase. From there, you would contact an agent and discuss the
life insurance products they have available to cover your needs.
Re-evaluate
your insurance needs when you reach retirement age. If you have purchased a term life
insurance policy, it has likely expired by the time you reach retirement age.
At this point, the cost of purchasing a new life insurance policy would be
prohibitively high because of your age. However, if you have planned well for
retirement, you shouldn’t need a life insurance policy. Your retirement
accounts should be able to provide for your loved ones in the event of your
death. Similarly, if you have a cash-value policy, you shouldn’t need that
anymore either. Cash out the policy and add the cash value to your retirement
accounts.
Understanding
Life Insurance Products
Compare
term life and whole life insurance. These are the two basic categories of
insurance available. Term insurance is good for a specific period of time,
whereas whole life insurance is good for your entire life if you the pay the
premiums. Term insurance is typically inexpensive, and whole life insurance is
pricey. This is because term insurance is pure mortality risk, administrative
costs, and commissions while whole life is mortality risk, an investment
portion, administration, and commissions. The difference is the investment
piece on the latter. This means that whole life insurance policies set aside a
portion of the premium you pay each month to be invested and grow in value.
Term life
insurance is basic and inexpensive. It is good for a specific amount of time.
For example, your term life insurance may cover your for 10, 20 or 30 years. If
you die during the term of your insurance, your beneficiaries get your death
benefit. If you die after the term has expired, your beneficiaries get nothing.
Whole life
policies are also known as cash-value policies. They are good until you stop
paying premiums. They do not expire after a certain number of years. Also, they
have an investment component attached. This means that part of the premium is
invested by the insurance company and earns interest. Three types of whole life
insurance are whole life, universal life and variable life.
Life
insurance policies should provide you with enough to provide financial support
to your family in the event of your death. While having a cash value policy
that grows over time sounds attractive, this option can be expensive. If you
would be struggling to pay the premiums on such a policy, then term insurance
might be the best option for you.
However, if
you can afford the premiums and you have maxed out your contributions on your
pre-tax retirement accounts, a cash-value life insurance policy might be a good
choice for you. Since the cash value builds up tax free, it provides you with
another opportunity to build your retirement nest egg.
Evaluate
the two types of term life insurance. You can choose from two different
types of term life insurance. The first is the “annual renewable term.” With
this type, you can purchase one year of coverage at a time. You have the option
to renew each year. The other option is “level premium term.” This means you
lock into a specific multi-year period, such as 10, 20 or 30 years.
With annual
renewable term insurance, the premium is likely to increase each year.
With level
premium term, you are guaranteed the same premium for the life of the term.
Assess
the three different kinds of permanent life insurance you can purchase.They are whole life, universal life
and variable life. Whole life, universal life and variable life policies use
different kinds of investment tools to grow cash value. The rate of return,
which grows cash value, depends on the risk involved in the investments.
Policies with higher-risk investments do not guarantee an amount for the cash
value of your policy (though the death benefit is always guaranteed).
Whole life
insurance pays a guaranteed amount to your beneficiaries upon your death. Part
of your premium is invested by the insurance company to grow the cash value of
your benefit. The fund grows tax-deferred each year that you keep the policy.
Universal
life insurance combines a life insurance policy with a money-market investment.
This type of investment is riskier. Therefore, policy holders can expect a
higher rate of return.
With
variable life insurance, the insurance policy is tied to a stock or bond mutual
fund investment. The cash value account is invested in several sub-accounts.
The investment grows or shrinks along with the performance of the mutual fund
accounts in the market. Beneficiaries enjoy favorable tax treatments.
These
choices differ primarily in their fixed and variable rates of interest
depending upon the investment vehicle chosen. In each case, the policy holder
pays a premium in excess of the actual mortality risk of the insured.3
Finding
the Best Life Insurance Plan
Assess
the reputability of insurance providers. Insurance providers are rated for
financial strength and reputability by a handful of ratings firms. These
ratings firms are TheStreet.com, Standard & Poor's, Moody's, Fitch, and A.M
Best Company. Not every insurance company will have a rating with all agencies,
but it is important to get ratings from each one that you can before purchasing
from an insurance provider, especially if the provider is not well known. Be
sure to also look into what the ratings terms mean for each rating firm.
Firms assign
ratings on different scales, with some using "A+" to denote their
highest rating and others using "AAA."
In general,
an assessment of "secure" (rather than the alternative,
"vulnerable") is a positive indicator of provider performance.
Choose
between term insurance and mortgage protection insurance when you buy your
first house. When you purchase your first house, it is probably time to consider
purchasing term life insurance. This allows the co-borrower on your mortgage to
receive a death benefit that would cover any living expenses and to keep paying
the mortgage. If for some reason you cannot meet the underwriting criteria for
term life insurance, purchase mortgage protection insurance. This pays the
beneficiary enough to pay off the mortgage on the house in the event of your
death.
Provide
for your family when you are expecting your first child. Once you are expecting your first
child, you need a life insurance policy to protect your family in the event of
your death. Your beneficiary can use the death benefit to maintain the same
standard of living for your children without having to worry about replacing
your income. Choose a policy that is sizable enough to pay for at least 18
years of child-rearing and household expenses. In addition, you can provide
enough to cover college tuition.Method4
Comparing
Life Insurance Quotes
Evaluate
the annual benefits and premium. Compare premiums to see if you are locked into a rate for a number of
years or if it varies each year. If you are on a fixed income, a fixed premium
might be better for you. Similarly, compare the death benefits. Depending on
the type of policy for which you are shopping, the amount of the death benefit
may not be guaranteed. Evaluate how much it is likely to fluctuate each year.
For example,
term life insurance policies are less expensive than permanent life insurance
policies. Their premiums are fixed, meaning you pay the same amount each month
for as long as you have the policy. Also, the death benefit is a guaranteed
amount. Your beneficiaries are guaranteed to get the amount of insurance you
purchased.
Permanent
life insurance policies are more expensive. Also, some invest part of your
monthly premium in order to grow the cash value of your policy. This means that
your monthly premium might vary. It also means that the amount of your policy's
cash value is not guaranteed (though your death benefit is). It can increase or
decrease depending on how well your investments perform.
Calculate
the amount of cash value you can accumulate. If you are shopping for a cash value
policy, determine how much the cash value can grow. Whole life, universal life
and variable life policies utilize different kinds of investment tools.
Depending on the risk involved, the rate of return varies. Cash value is
important for when you do not die.
Speak with
your insurance agent about the kinds of investment tools they will use and how
risky the investments are. The riskiest investments have the potential for high
rates of return. This means the cash value can grow quickly. But, they also can
crash just as quickly, depleting your investment. This means that the amount of
death benefit paid to your beneficiaries decreases.
Decide how
comfortable you are with the different levels of risk before settling on a
policy.
Assess
the fees. Some insurance providers build fees
into your premiums. Before purchasing a policy, read the fine print to learn
about policy fees. Policy fees mean that some of your premium is being paid to
the insurance company instead of going into your death benefit. This also means
that less of your premium is being invested and allowing your cash value to
grow. If you are using your life insurance policy as an investment tool to
build your retirement nest egg, the fees charged by the insurance company can
exceed the fees you would pay to invest the money elsewhere.
Ask if
you can convert a term policy to a cash value policy. Some insurance providers write a
clause into your term policy that allows you to convert it to whole life
without providing new evidence of insurability. This means that you can convert
the policy regardless of your health. You don’t have to undergo physical
examinations in order to re-qualify. If this is something that interests you,
choose a policy with this clause.
Find out
if the cash value portion of your policy has dividends. This means that you would share in
the company’s surplus if you own a permanent policy. Each year, once the
company has paid claims, expenses, other liabilities and has funded reserves
for future benefits, it pays the excess to policyholders in the form of
dividends. You can reinvest the dividends into your policy, or you can cash
them out.
This only
applies to mutual companies, not stock companies, which have shareholders
instead of policyholders.
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