The main function of life insurance is to replace your income when you die. Life insurance is particularly important for people who are supporting a family because it helps protect against surviving family members being unable to maintain their lifestyle after a breadwinner dies. Familiarizing yourself with life insurance is an important part of planning for your financial future.
1. Not Everyone Needs Life Insurance
People who are single and have no dependents probably do not need life insurance. However, if you are a single person and your employer offers a policy at no cost to you, there is no harm in taking it. People who are married or have children usually can benefit from purchasing life insurance. Even if you are not the primary earner in the family, your family probably relies on your income to cover expenses. Purchasing life insurance helps ensure that your family can still pay the bills, keep their home and your kids can still go to college if you die.
2. There Is More Than One Type of Life Insurance
Term life insurance is a policy that lasts a set number of years. When a term policy expires, you will need to purchase a new policy. The primary benefit of term life insurance is that the rates are significantly lower than whole life policies. They also offer more flexibility for changing life situations. However, as you age and your health status changes, term life policies could become more expensive.
A whole life insurance policy has a set cash value and is good for the remainder of your life. In addition to providing the benefits of life insurance, this type of policy has a cash value that you can withdraw or borrow against. Whole life policies also have a fixed premium that does not change with your age and health status and can offer some tax benefits. If you are considering a whole life policy, you may want to consult with an investment advisor. They can explain to you the benefits and pitfalls of using life insurance as an investment, such as the debate over the infinite banking scam.
3. Not Everyone Needs the Same Amount
The amount of life insurance you need to purchase depends on your family's lifestyle, your current and expected income, how old you and your partner are and how old your children are. To determine how much insurance you need, you will need to calculate how much money your family spends in a year. You should aim for a minimum amount that covers your annual expenses. You may also want to include an additional amount to cover outstanding debts, the mortgage on your house and your children's college education. If you are approaching retirement age, you do not have children or your children are grown and supporting themselves, your life insurance needs will likely be lower.
4. Know the Renewal Requirements
Most term life insurance policies can be renewed; however, in some cases, you may be required to submit to a health exam to see if your health status has changed. Many term policies can not be renewed once you reach the age limit. Your premium may also increase when you renew your policy. It is important to know whether your policy can be renewed and what the new premium will be so that you can make decisions about potentially replacing the policy before your current policy expires.
5. You Choose Your Beneficiary
You get to decide who receives the benefits of your life insurance policy. If you have a partner or children, usually one or more of them will be your beneficiary; however, if you are single you can choose your parents, siblings or even a charitable organization.
Life insurance is an important component of your financial planning. Purchasing a life insurance policy can provide you with peace of mind that your family will be protected from financial hardship after your death. Whole life insurance can also provide an investment vehicle and other benefits.