Published on: 1/08/2024
Introduction
When you buy life insurance, you enter into a contract with an insurance company that promises to provide your beneficiaries with a certain amount of money upon your death. In return, you make periodic payments, called premiums. The premium amount is based on factors such as your age, gender, medical history, and the dollar amount of life insurance you purchase.
In the event of your passing, life insurance provides money directly to your beneficiaries. They can use the money for:
- Making up for your lost income
- Funding a child’s education
- Paying off household debt
- Paying for your funeral and other related expenses
Certain types of life insurance may provide benefits for you and your family while you’re still living. For example, permanent life insurance offers a cash value component, which can be put to good use during your lifetime.
The most common type of life insurance is often referred to as Term life insurance offers protection for your loved ones for a specified period of time—usually from one to 20 years. If you stop paying premiums, the insurance stops. Term policies pay benefits if you die during the period covered by the policy; but they do not build cash value.
Another type of life insurance is a Whole life insurance policy. These policies do not expire; they are intended to protect your loved ones permanently, as long as you pay your premiums. Some types of these policies accumulate cash value.
How Much Life Insurance Do I Need?
Your goal should be to develop a life insurance plan (through one or more policies) that, following your death, compensates for the loss of your economic contribution. Here are two ways to determine how much life insurance you may need.
Calculate replacement income need.
This is a well-established method to determining the financial contribution you can expect to make to your family from now until you would retire. It’s more than just replacing your income; it takes into account everything you provide for your family, including:
- Salary
- Benefits/health insurance
- Retirement savings
- Personal services you perform for your family, such as child care, cooking, home maintenance, etc.
- Less, your personal consumption—annual spending on personal needs, such as food, clothing, entertainment, etc.
Survivor needs analysis.
This approach is based on replacing an amount of income needed for your surviving spouse and children to maintain a desired level of income and lifestyle. Your survivors’ needs are then compared to their assets, existing life insurance and income sources to determine any additional life insurance requirements. An insurance professional or financial advisor can help you determine an accurate figure and choose appropriate coverage.
3 Reasons Why You Should Buy Life Insurance
Life insurance may not seem like a priority when you're young and don't have the responsibilities of a family. You might wonder why you need coverage, who it would benefit and how it might save you money later.
Here's why getting life insurance coverage now is a smart financial decision.
1. Life insurance premiums are based on your age and health.
Getting life insurance coverage can be easier while you're young and healthy. Insurance carriers offer and price life insurance policies based on your age and health at the time you apply. Life insurers know the younger you are, the more likely it is you'll be around for many years. This makes insuring you less risky for them and cheaper for you — probably less expensive than you imagine.
Getting life insurance before unexpected health changes occur can be beneficial. Insurers also base pricing on answers you give to questions about your health. These answers help insurers determine the probability that you'll stay well.
2. Life (and insurance) gets more expensive with age.
Your expenses will inevitably grow as you get older and move forward in your career. Your budget will have to change based on where you decide to live, if you buy a home and especially if you decide to get married and start a family.
Your life insurance coverage should also grow to reflect these changes, and if you buy life insurance early — before these different life stages — it will likely cost less to adjust your policy as time goes on than it would to buy a new policy later in life. By taking advantage of lower premiums when you're younger, you'll be saving money on insurance costs later.
3. You may be able to obtain more money in term insurance now.
Since it's usually more affordable to buy a policy when you're younger, you may be able to obtain more in term life insurance. Term insurance, as the name suggests, is life insurance that provides coverage for a specified period of time (the “term”) at a fixed rate that will remain the same across the life of the policy. Generally speaking, term policies tend to be more affordable than whole life insurance policies, delivering more bang for your buck.
The primary purpose of life insurance is to protect your income and those who depend on it. As your life grows and changes, it’s important to make sure you’re covered every step of the way. Having life insurance in place early on can set you up for greater savings and better financial protection down the road.
It’s never too early to start thinking about life insurance – get the financial security you and your family need and deserve.
