Understanding Life Insurance Policies
Life insurance can obviously be a good thing to have, but with the many options available to seniors and elderly persons, it can all be a little overwhelming. It’s also important to remember that if you don’t really need it, you shouldn’t buy it. So let’s first look at that question: Do you need life insurance? The answer to that question varies from person to person. For instance, if one does not have any dependents, that individual most likely does not need life insurance. Also, if you do not contribute a significant percentage of your family’s income you might not need life insurance.
However, if your salary is important to supporting your family, paying a mortgage or any other recurring bills, or sending children to college, then life insurance becomes important in making sure these financial obligations are still covered in case something should happen to you.
So, how much life insurance do you need exactly? That can be difficult to answer, since the amount you need is dependent on factors like other sources of income, the number of dependents, your debts, and your lifestyle. However, as a general guideline, you’re looking at between five and ten times that of what you make per year.
If you’re curious which type of policy to buy, some experts recommend a term life insurance policy if you’re under 40 and don’t have a family disposition to life threatening illnesses. This type of insurance policy offers a death benefit but no cash value. On the other hand, a whole life policy offers a death benefit and cash value but is oftentimes much more expensive. Half of all the cash value policies are surrendered in the first seven years, and this causes the coverage to be extremely expensive due to huge commissions (of thousands of dollars in the first year) and fees that limit the cash value in early years.
In the case of a whole life policy, premiums stay the same throughout the duration of the policy (until your death), even after all premiums have been paid. A reserve of cash is accumulated, but you don’t control how that cash is invested.
With variable life policies, a cash reserve is accumulated in which you can invest in any choices offered by the insurance company. The value of the reserve is dependent on how well those investments are doing.
Universal life policies will allow you to vary the amount of your premium by using a part of the earnings you’ve built up to cover part of the cost of the premium. You also have the option to vary the amount of the death benefit, but you’ll pay higher administrative fees in exchange for this flexibility.
So how much does it cost? The cheapest insurance will likely come from the group life insurance plan from your employer, and these are mostly term policies, which means you’re covered for the length of your employment with that company. Although, it’s worth noting that some policies can be converted upon termination. Costs of other insurance greatly depends on how you buy, the type of policy you choose, the underwriter’s practices, how much commission that the company pays the agent, and more.
There is much more to consider, but to wrap up, remember to educate yourself on the basics of life insurance, find a broker you trust, and then have his or her recommendations evaluated by a fee-only insurance advisor. Life insurance can be important, and it is. But you want to make sure that you’re making the right choices for both you and your family.