Tips for Choosing the Right Life Insurance Policy for You
You’ve been thinking you need to purchase life insurance, but you don’t know anything about it, much less how much or what type you need. This article will explain the different types of life insurance available to you and help you decide which to purchase and how much coverage you need.
Whole Life Insurance vs. Term Life Insurance
Whole Life Insurance
Also called permanent or universal whole life insurance which accrues cash value over time and as you pay premiums. Although terms differ among policies and insurers, in general, a whole life policyholder can borrow against the value of the policy and pay flexible premiums. The beneficiaries receive a fixed death benefit upon the death of the insured.
While many of the benefits of investing in a whole life insurance policy may seem attractive to many, they are appropriate for only the very few of us who have maxed out retirement savings and are looking for another vehicle to save a considerable amount for retirement. The fees are prohibitive for small investors.
Term Life Insurance
Term life insurance is the least expensive and most popular type of life insurance available. It is what it says it is: a policyholder purchases a policy for a term of years, say, 10, 15, 25, or 30 years, and pays premiums. If the policyholder dies within the term, their beneficiaries receive a lump-sum death benefit in the amount of coverage purchased. If the policyholder does not die within the term, the policy expires with no payout.
Because term life insurance policies have no cash value and can expire without paying out, they are very inexpensive for most policyholders.
Group Life Insurance Through Your Employer
Often employers will offer participation in a group term life insurance program for qualifying employees, free of charge or at low cost. The amount of coverage is usually a multiple of the employee’s annual salary.
If participation in the group plan is free of charge, it would be foolish to turn it down as it would be “free money” for your beneficiary or beneficiaries if something happened to you. Also, many group policies offer a rider called “Accidental Death and Dismemberment,” commonly known as “AD&D,” for a small additional fee. AD&D coverage pays you if you become injured due to an accident, and pays your named beneficiaries more if that accident results in your death.
How to Calculate the Amount of Life Insurance Coverage You and Your Family Need
To calculate the amount of life insurance coverage you need, you have to take stock of your life situation. Ask yourself:
- How old am I?
- Why am I purchasing life insurance coverage?
- Who is the coverage for?
- What do my beneficiaries need the death benefit?
- How old are they?
- Do they have any other financial resources?
After you’ve answered these questions, it is simply a matter of mathematics.
If you are relatively young and recently married, and your spouse works but you just bought a home, you may need coverage in an amount to pay off that new mortgage.
If you’ve been married a while, have young children in school, and your spouse works part-time, you may need coverage for the children’s educational needs and living expenses in the years to come, and perhaps college, and you may want to supplement your spouse’s income until the children are grown.
If your children are grown and out of the house and you are both retired, you may want coverage in an amount to pay taxes on the home, supplement your spouse’s social security and retirement income, and pay for funeral expenses.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a life insurance attorney.