If you've ever wondered how to best protect your loved ones after you die, it's time to learn more about life insurance. These policies are a way to provide a means to pay for expenses that will come once you pass away, which will happen eventually – whether you want to think about it or not.
According to the Life Insurance and Market Research Association, 70 percent of American households have a life insurance policy. But of those 87 million Americans, a large portion are underinsured. As a result, spouses, children and other dependents are at risk for an instable financial future.
Financial experts consider life insurance an important part of any long-term household plan, even though many remain confused about the process. Here are 10 things you need to know to learn more about this vital financial coverage:
A common misconception about life insurance is that your policy is determined by your professional value. Your policy can be designed with many other factors beyond your salary. Life insurance can cover final expenses and any outstanding debts, as well as planned expenses like formal education. In short, these policies provide a financial peace of mind for loved ones who will be dealing with a loss.
There are actually four roles to understand in the creation of a life insurance policy. There's the insurer, or the company that will pay out claims when a death occurs. Then there's the beneficiary, which can be either a person, trust or other entity, who will receive the death benefit. The owner of the policy is the person responsible for paying the premiums to the insurance company. The insured is the person whose life is the subject of the insurance. As the insured person ages, it is wise to appoint a trusted loved one with power of attorney specifically outlining responsibilities for insurance purposes.
Single people who don’t have any children and enough money in the bank to cover final expenses may not need life insurance. But if you are the head of a household, have children or have debts, life insurance is a necessity. Life insurance is also an important part of planning for business partners, if your parents are dependent on you, if your siblings are dependent on you or a host of other circumstances. If someone looks to you for financial help, you should have a life insurance policy.
Your policy will be either a term policy or a permanent policy. A term policy is the least expensive and most common. The insurer will determine a premium based on the term for which the insured will probably live. The term could be 10, 20 or 30 years, typically. The premiums will be guaranteed for the length of the term. The other kind of policy is a permanent life insurance policy. While it involves the same general timelines and premium calculations, it includes a savings element that allows the policy to exist until the insurer eventually passed away – even if it is longer than the probability term.
If you are healthy, do not smoke and are relatively youthful, you may find that a term life insurance policy will cost just a few hundred a year and result in a million-dollar benefit when you pass away. However, if you smoke or have serious health problems, you will be considered a greater risk for the insurance company and will have to pay a much higher premium. It's worth comparing rates regardless of your health.
To get an idea of how much you should have as a life insurance policy, first consider your debts. You'll need to make sure your policy will pay for loans and other debts, along with any interest or charges that come with them. Second, do a little math regarding how much it would take to cover your salary. Multiply your salary by the number of years left until retirement, and then add on another year to adjust for inflation. You can presume that the lump sum can be invested over the years, but you may need to select a financial planner to help with that. Online calculators can help you before you shop around.
Technically, it's really good news that you've outlived your term life insurance policy. But if you've been diagnosed with a fatal disease just before the term is up, you'll be grateful if you've purchased a policy with a renewable clause. This clause means that you'll be able to renew your policy without a medical exam at a competitive rate – even though the insurance company will certainly be paying out the benefit eventually.
Permanent policies, or cash-value policies, include a savings mechanism – but most financial experts believe there are better ways to invest. In general, index funds or other methods you can discuss with a financial advisor can yield greater dividends. Life insurance should be just one element of a strong financial plan. If you do not have any investments, this is better than nothing.
Sure, life insurance will be less expensive if you are younger. But if you are willing to pay the premiums, you can find a good policy at almost any age. There is no cut-off for qualifying.
If your circumstances change or if you realize you are overpaying, you may want to cancel your policy. Think carefully. If you have health issues before confirming a better policy, you may put yourself at risk. If you decide to cancel, all you have to do is stop paying your term policy premiums. If you have a permanent policy, analyze the tax implications and future value before moving forward with your agent.