The topic of life insurance can often conjure uncomfortable feelings. Some may even be intimidated by the thought of purchasing a life insurance policy. Why? We primarily like to avoid thinking about our expiration dates, but it’s an inevitable fact of life. If you fail to plan properly, your loved ones may incur debt or resort to creating GoFundMe campaigns to cover funeral expenses.
According to the most recent LIMRA (Life Insurance and Market Research Association) 2015 Barometer Study, 29 percent of Americans indicate they would feel the financial strains within one month of losing the income of one of their primary breadwinners. Another 43 percent would feel the impact of a loss within 6 months. Dealing with the death of a loved one is enough of a burden itself — life insurance helps you deal with the financial burdens that can accompany the death of a loved one.
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Who Needs Life Insurance?
If you contribute to the financial well-being of another human being, it’s safe to say you need life insurance. Whether you are a young newlywed couple, doting new parents, middle-aged parents, singles, or retirees — you need to protect your family against the financial impact of losing you. There are many policies that fit the needs of every individual.
How much life insurance do you need?
In America, 46 percent of people die with less than $10,000 in financial assets, or none. Many individuals risk leaving behind a legacy of debt and unintentional burdens on their loved ones. Consider life insurance as a way to build wealth for your family, in the event you can no longer take care of them. It should be considered a fundamental element of any financial plan.
Financial expert, Dave Ramsey recommends 10 to 12 times your income in life insurance.
More conservatively, the least amount should be at least 5 to 10 times all sources of income. For example, if you are a 30-year-old, married individual with two children, with a salary of $32,000 — an amount between $320,000 and $384,000 would be reasonable if you have no debt. If you have a considerable amount of debt (including a mortgage), it would be safer to go with 10 to 12 times the amount of your income.
Regardless of the amount, it should cover consumer debt, mortgages, dependent education, and normal living expenses. Your spouse or significant other would need money to cover utilities, insurance, and home maintenance for years to come.
Also, do not neglect to factor in funeral costs. According to the National Funeral Directors Association, the average cost of a funeral is $7,045. This figure should give you an idea of how much your family would spend to provide a proper burial. Consider all financial impacts, not just the salaries of working individuals. Individuals who contribute to the household by preparing meals, cleaning, childcare, etc, are providing a service — one that would be lost after death.
What types of life insurance are available?
Term life and whole life insurance are two types of policies you should become familiar with prior to purchasing. It’s important to know the differences between these two policies because each one caters to different needs. These differences are reflected in the premium price.
The most affordable of the two policies is term life insurance.
Term coverage provides coverage for the specified timeframe stated in the policy, whether it’s 10, 20, or 30 years. The premiums start low and increase as the insured party ages. These policies have no cash value, which makes it affordable for most budgets. This policy is ideal for young couples, families, or singles because of their affordability at a young age.
The second life insurance policy is called a permanent policy.
Permanent policies can be whole, universal, or variable life insurance. The most popular permanent policy is a whole policy — where a benefit is paid after death and the policy accumulates a cash value. Whole life insurance policies remain in effect for the entire life of the insured and the premiums do not increase with age. These policies are ideal for retirees as they would meet the needs of someone who has no dependents or increased assets.
How much will this cost you?
Life insurance is no more expensive than any other bill you may pay. No matter your age, there is a policy out there that can fit within your monthly budget. As discussed previously, the policy you purchase determines the premium amount, that’s why it’s encouraged to look into term life insurance as early as possible.
Consider the following scenario:
Angela and Mark are 25-year-old newlyweds on the hunt for life insurance. Both are in good health and are non-smokers. Angela’s income is $25,000 and Mark’s income is $30,000. They have a mortgage and no other outstanding debts. Their financial planner has recommended that they find a policy worth 10 to 12 times the amounts of their individual salaries.
Angela was given a quote of: $12 for $250,000, $14 for $300,000, and $16 for $350,000. Mark was given a quote of $15 for $300,000, $17 for $350,000, and $ 19 for $400,000. Angela and Mark decide the appropriate policies for them would cost $27 per month and provide $550,000 worth of life insurance.
Younger individuals can secure less expensive premium rates for term insurance. These premium rates increase as you age, so a middle aged or retired individual would find it difficult to secure a term policy at the example rates given above. Also, as you age, the likelihood of needing a larger policy decreases. Therefore, whole life policies would be more affordable.
Let’s consider Mia and Kevin who are 55-year-old early retirees. This couple has no debt, no mortgage, 2 adult children, and 3 grandchildren. They want a policy large enough to cover their burial expenses and to provide each of their grandchildren with a small financial gift towards their education.
Given their financial situation and wishes, they can choose a whole life policy with payout amounts of $20,000 or more and manage to have their needs met. Whole life insurance policy amounts range from varying amounts — some as low as $1,000. The premium amounts are determined by multiple factors such as: cash accumulation, age of the insured, and the policy payout amounts.
How Do You Build A Legacy with Life Insurance?
As mentioned above, upon death, the life insurance policy will pay the amount owed to the beneficiary. You can have as many life insurance policies as you’d like and you can select multiple beneficiaries for one policy.
In addition to leaving money for your family, another way to create a legacy is to assign a trust as the beneficiary of a policy (although it would be subject to estate tax). A trust agreement is a document that spells out the rules that you want followed for property held in trust for your beneficiaries. You may request that this money be established as a scholarship fund, small business grants, or payable to the charity of your choosing. You decide how you would like the funds to be spent.
What If You Have A Policy Through Your Employer?
You should still get a separate policy for the following reasons:
Employer policies usually aren’t enough. The value of your employer policy is usually your salary or two times your salary. It is recommended that your policy is 10-12 times your salary. Enough said.
You’ll lose coverage if you leave the job unless your employer offers a portable policy but note that the costs of doing so are often higher than what you would pay if you purchased a separate, independent policy. If you are employed by your job for several years, you could miss the opportunity to lock in lower rates at a younger age by waiting until you are no longer employed with them.
It may not be the most cost effective. Some employees will cover your life insurance premiums. Others require you to pay them. Just because it is offered to a larger group doesn’t mean the rate is competitive. Do your research and compare the policies, coverage, and premiums available to you.
Life insurance is affordable. There are many policies for different needs. Younger individuals can secure better premium rates for term insurance. Whole Insurance is an affordable option for older individuals.
Whole life insurance policies are small policies that cover the basics -assuming you have no debt and no dependents. Term policies are designed for individuals with many responsibilities and debt.
The best way to determine which policy is best for you would be to consider how much income would be needed if something were to happen to you or another primary income earner. Your policy should cover all obligations and funeral expenses. If you don’t have life insurance, you need it. You can find a policy that works for you and your budget, no matter your financial situation.
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