How to Buy Life Insurance
The thought of the inevitable occurrence of death usually frightens people so much that they create the wrong idea that if they buy life insurance – it’s synonymous with purchasing a coffin, which appears to be the common misconception that forestalls about forty percent of Americans from having any coverage.
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It would be best if you did not allow the fear of the inevitable and unexpected situation to blindfold you from seeing the benefits that come when you buy life insurance policy. A life insurance policy is primarily a financial plan that is most times used to protect your family, especially if the income provider of the home passes unexpectedly.
What is life insurance?
With this preliminary discussion on life insurance, one can define life insurance in two words: income replacement. Life insurance policy involves two bodies, the policyholder and the insurance provider. The premiums paid by the policyholder will be exchanged for income or benefits (that is, income replacement) that will be disbursed to the beneficiary of your choice if you pass away.
Life insurance is, therefore, a financial planning tool that is not limited to the provision of income replacement but also provides financial assistance to a family that lost their income provider. If you have decided to buy life insurance to either provide financial aid to the loved ones you will be leaving behind or pay a mortgage and other loans, you will have to acquire knowledge of the types of insurance policies. There are, however, two basic categories of life insurance policy, and they include term life insurance and permanent life insurance.
Term life insurance
Term life insurance is a type of life insurance that offers coverage for a particular period, ranging from five to thirty years. However, the most typical coverage length is usually twenty years. If the insured passes during this set aside period of coverage with an active policy, the insurance provider will pay death benefits to the beneficiary of your choosing (usually their family and loved ones). The paid benefits will, however, help in the replacement of lost income and the payments of living expenses, such as rent, mortgage, or other debt you leave behind, funerals, and unpaid medical bills.
If the insured is still alive after the specific coverage period, the policy becomes inactive and may be activated by a higher premium charge, or the policy will be terminated.
Permanent life insurance
Permanent life insurance is a type that, if you decide to buy life insurance, lasts forever, unlike term life insurance that lasts for a specific period you chose when you purchased the policy. Permanent life insurance policies primarily offer the insured death benefits and cash value according to their premium. The sum of money that is paid to the beneficiary of your choosing is called death benefits. On the other hand, a part of your premium payment usually goes to savings or investments as cash value; you, however, have accessibility to this cash value while you are still alive. Several types of permanent life insurance vary in flexibility and benefits, among which the whole life insurance policy is the commonest.
Universal life insurance is another type of permanent life insurance, prominent for their flexibility they offer over the whole life insurance policy. They provide the insured the chance to increase their death benefits and mitigate their monthly and annual premium charges once they have accumulated enough cash value in their policy. On the contrary, the whole life insurance policy’s premiums and death benefits will remain constant during the policy’s duration.
Final expenses insurance is also a type of whole life insurance policy specifically designed for seniors above fifty years of age. They offer limited coverage for funeral expenses and medical bills.
Who needs a life insurance policy in a household
The primary categories of a life insurance policy include the term life insurance policy and permanent life insurance policy; they offer coverage with the policy’s death benefits to a specific beneficiary or cash value the insured can access, especially when they are down with a critical illness that demands long-term medical care. It’s presumed by many that an income provider in a household is the one one that should buy life insurance. Still, it is false because a household can buy as many life insurance policies as they will require to meet both their short-term and long-term needs.
It is, however, important to purchase your life insurance policy earlier rather than waiting on the closeness of your retirement before buying a policy because there is about an eight percent increase and a ten percent increase in the cost of purchasing coverage at your early fifties and late fifties, respectively.
Apart from the increase in the cost of your attempt to purchase a coverage late, there will also be less coverage to purchase as you approach retirement due to the limitation in your insurable interest. Therefore you will be left with a much lesser amount of coverage to purchase after retirement.
If you have decided to purchase a life insurance policy, you will have to consider how much of it you will need, and this is done by subtracting your assets from your long term obligation.
Illustration
If you want to provide your family with about eighty percent of $60,000 income for a specific duration of twenty years—that is, $48,000. Let’s also assume you have an outstanding debt of $100,000 and you want to provide $70,000 for your children’s education, and you expect $10,000 for your funeral expenses. The calculation goes thus:
$48,000 X 20 = $960,000
$100,000 + $70,000 + $10,000
= $180,000
You will need ($960,000 +$180,000) $1,148,000 for your life insurance
coverage
Since you have $200,000 from the
the sum of savings & non-retirement
policy investment and life insurance
policy via your employer
You will then subtract $200,000 from
$1,148,000 to arrive at $948,000
in coverage for your family.
You will need this calculation process to determine the accurate coverage of your life insurance policy in the short-term and long-term protection of your family’s need when you pass.
Take everything into account when deciding to buy life insurance.
