While the thought can be unpleasant, the financial future of your loved ones in the event of your death is a vital matter. To choose the right life insurance policy for you, you'll need to calculate how much coverage you need and have a basic understanding of the various types of policies available.
Calculating life insurance coverage
To determining how much life insurance your family needs, calculate how much money it would take for your family to maintain its current standard of living in the event of your death. It is important to take the time to calculate realistically and accurately. Under-insuring could result in hardship for your family, and over-insuring is likely to be costly.
These questions can be helpful for calculating how much life insurance you need(continued below):
- How much of the family income do you provide? Do others depend on you, such as parents/siblings?
- Besides current living expenses, are there future financial obligations you want your life insurance to pay off, such as a mortgage or a child's college education?
- How much will your funeral expenses cost?
- Will your family have to pay an estate tax?
- Have you considered inflation and taxes in your figures?
- Are there any assets that could be sold if you died?
Types of life insurance coverage
Two primary types of life insurance exist, and which you choose depends on various factors, including how long you wish to be covered, and if you'd like the policy to build up a cash value — the latter of which could potentially boost your savings rates.
1. Term life insurance This provides coverage for a specified length of time, such as 5, 10 or 20 years or to a specified age. If you die during the term, the life insurance company pays your beneficiaries the face value of the policy. No benefit is paid if you live longer than the term.
Overall, term insurance is the least expensive type of life insurance, although it becomes more costly as you age. You can usually renew term insurance at the end of a term, although your new premiums will tend to be higher.
If you have a limited amount to spend on insurance and a specific time period that you want covered, a term policy may be your best option. Some term insurance policies can also be converted to cash value insurance (see below).
2. Cash value life insurance This coverage provides death benefits that accumulate interest. You typically pay more for such coverage in the early years than for term insurance, but the policy continues indefinitely as long as you pay the required premiums. Cash, including the interest accumulation, is paid to beneficiaries upon the death of the owner, or if the individual chooses to close the policy before death, the existing interest accumulation is paid to that person.
Purchasing cash value life insurance is only wise if you plan to hold the policy for a number of years, as there are typically substantial penalties for cashing out early.
Whatever type of life insurance you choose, it's important to always keep up on the payment of your premiums, as lapsed coverage will lead to cancellation of your policy and a lack of death benefits.
And just the same as savings accounts, when you're ready to compare your options for life insurance, online resources can be a great place to begin your investigation.