What To Consider Before Buying Life InsuranceAugust 15, 2016
Last Updated on December 12, 2019
Life insurance is not a typical subject that we consider when mapping out our future finances. However, if something were to happen to you as the primary breadwinner, you should think about the benefits of securing your family’s and your loved ones’ financial future.
Life insurance helps ensure that your beneficiaries — and those who are financially dependent upon you — are well taken care of, but also, that your expenses and debts, like certain student loans, are covered. While financially protecting a person’s family is possibly the most widely thought of reason to purchase life insurance, it is also important to note that life insurance is also commonly purchased by those wishing to protect a person’s business or, for those with higher-net-worth, protect heirs from hefty taxes.
While there are many factors in determining whether you should buy life insurance, the following are probably the most essential.
How Much Life Insurance Coverage Will You Need?
To do this, you will need to estimate your current financial situation, and then try to consider how much your loved ones will need in the future. According to NerdWallet, “you should find your ideal life insurance policy amount by calculating your long-term financial obligations and then subtracting your assets. The remainder is the gap that life insurance will have to fill.” Long-term financial obligations may include accounting for a multiplied figure of your annual income, childcare or education expenses for any children, your debts, and any student loan debts that may not be discharged. For more tips, visit NerdWallet’s blog: How Much Life Insurance Do I Need?
Which Policy Type and What Duration?
There are two major types of life insurance: term life and permanent life (which includes whole life, universal life, and variable life). Term life provides coverage for a specific time period — typically 5, 10, 20, or 30 years — and if the policy is invoked within the term (and your premiums are paid up), your beneficiaries receive the payout amount. Permanent life insurance policies, on the other hand, cover you for your entire life and may include a “cash value” or investment component.Most consumers choose term life insurance, as it not only covers you for a set amount of time, but it is often the cheapest option among all life insurance policy types. Certain financial advisors (Suze Orman, Dave Ramsey, and The White Coat Investor), hoping to steer their younger readers toward financial independence, will warn consumers against permanent life insurance. Instead, they encourage readers to only buy term life insurance (long-term or long enough to cover your longest financial obligation), with the idea that as you get older and become financially independent through work, paying off debts, and sound investments, you will not need to protect your family with life insurance. Plus, there is the belief that permanent life insurance is too expensive for the kind of coverage you may receive. There are, however, some whose situations may benefit from permanent life insurance, which Larry McClanahan says may include: business succession, estate equalization, additional tax-sheltered savings, and life and long-term care combinations. Be sure to talk to a trusted financial advisor, without any financial interest in life insurance, for more information on your specific needs.
Apply and Submit Health Information
To receive a quote, the application process involves submitting basic information about yourself, your health, and your lifestyle. This will likely include questions about your medical conditions, medications, family history, smoking habits, participation in extreme sports, and more. Health records and medical exams may need to be released, and a medical exam may need to be administered.
Maintaining Your Policy
After you apply, are approved, and buy your life insurance policy, it is imperative that you pay your premiums on time, every month. Otherwise, your policy will be canceled. The easiest way to avoid a missed payment is to set up automatic payments with your checking account. The only other thing you will need to do is update your coverage as life events change (buying a new home, getting married, having children, etc.).
There is a lot to consider when it comes to life insurance, so take the time to calculate your long-term financial obligations, and find the plan, policy, price, and company that serve your loved ones best. In certain cases, these financial obligations will include student loan debts. The ability for your student loan debts to be passed on to someone else will depend on the type of student loan you have, the state you live in if you have a cosigner, and more.
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