Many people are afraid of the inevitable event of death, and as a result, they may develop the misconception that purchasing life insurance is similar to buying a coffin. Unfortunately, this misconception prevents about forty percent of Americans from obtaining any coverage.
Your Guide to Purchasing Life Insurance
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Do not let fear of the inevitable and unexpected blind you from seeing the benefits of purchasing a life insurance policy. A life insurance policy is primarily a financial plan that is often used to protect your family, especially if the primary income earner of the household passes away unexpectedly.
What is life insurance?
After this initial discussion on life insurance, it can be defined as “income replacement” in two words. Life insurance policies involve two parties: the policyholder and the insurance provider. The premiums paid by the policyholder are exchanged for benefits, such as income replacement, that are disbursed to the beneficiary of the policyholder’s choice in the event of their passing.
Life insurance is not just a tool for income replacement but also a means of providing financial assistance to families who have lost their income provider. If you have decided to purchase life insurance to support your loved ones after your passing or pay off debts like a mortgage, it is important to understand the various types of insurance policies available. There are two primary categories of life insurance: term life insurance and permanent life insurance.
Term life insurance
Term life insurance is a type of insurance that offers coverage for a specific duration. Once the coverage period ends, the policy may be terminated or the premiums may increase. As the policyholder’s age increases, the duration of coverage typically decreases. For example, insurance companies generally do not offer seniors over the age of sixty with term life insurance policies lasting more than thirty years. Instead, they provide coverage lengths of twenty years or less.
Permanent life insurance
This refers to the process of converting a chosen type of insurance policy into a permanent type of insurance. Typically, a whole life insurance policy is the policy most commonly made permanent. With most types of permanent life insurance policies, there is an investment or savings component that allows for the accumulation of the policy’s cash value.
As the policyholder, you have access to the cash value of a permanent life insurance policy in the form of loans, and you can also use it to pay your premiums when you face financial difficulties.
Who needs a life insurance policy in a household?
The two primary categories of life insurance policies are term life insurance and permanent life insurance. Both offer coverage in the form of death benefits to a specified beneficiary or cash value that the insured can access, especially if they require long-term medical care due to a critical illness. While many believe that only the income provider in a household should purchase life insurance, this is untrue. Households can purchase as many policies as they need to meet their short-term and long-term needs.
It is crucial to buy a life insurance policy early rather than wait until retirement because the cost of purchasing coverage increases by about eight percent and ten percent in your early and late fifties, respectively. Additionally, as you approach retirement, there will be less coverage available to purchase due to limitations in your insurable interest. Therefore, you will have less coverage to purchase after retirement.
If you plan to purchase a life insurance policy, you must consider how much coverage you will require. To do this, subtract your assets from your long-term obligations.
Illustration
If you want to ensure your family has 80% of your $60,000 income for the next 20 years, that’s $48,000 per year. Let’s also say you have $100,000 in outstanding debt, you want to provide $70,000 for your children’s education, and you expect $10,000 for funeral expenses. The total calculation is:
$48,000 x 20 = $960,000
$100,000 + $70,000 + $10,000 = $180,000
Therefore, you would need a life insurance policy with coverage of $1,148,000.
If you already have $200,000 in savings, non-retirement policy investment, and life insurance from your employer, you would subtract that from the total coverage amount to get $948,000 in coverage for your family.
It’s important to use this calculation process to determine the appropriate coverage for your life insurance policy to meet your family’s short-term and long-term needs when you pass. Consider all factors when deciding to purchase life insurance.
