You know that in order to protect your family’s financial situation, life insurance is necessary. It’s the way you provide for your family, if the unthinkable should happen to you. Life insurance provides a source of income for your family in your absence. There are two main categories of life insurance: Term and Whole/Universal. The least expensive type of life insurance is often term life insurance. This is because it is only in force for a limited amount of time, rather than covering you for your entire life. Many people find that term life insurance can meet their needs in many circumstances.
When you purchase an insurance policy, the company agrees to pay a certain amount of money upon your death (suicide not included). You make regular payments, called premiums, to the company. The life insurance company invests your premium money to earn a return. The hope is that your premiums will generate enough gains so that when the company pays out the death benefit to your family, it won’t be losing money. If you live a long time, paying more in premiums, then the company is more likely to break even, or earn money.
The Basics of a Term Insurance Policy
When you purchase a term insurance policy, it is only good for a set term. This can be anywhere from five to 40 years. Many people choose 20 year term life, since it often covers you until the kids are out of the house (depending on when you get it — and when you have kids). I have 30 year coverage, designed to ensure that my life is covered until my target retirement age. As long as you pay your premium, you remain insured until the end of the term.
Some insurance companies allow you to open a new term policy at the end of the old term, with a similar premium, if you have been a good customer. There are even a few insurance companies that will refund part of your insurance premium if you live out your term. The premium you pay depends on the following factors:
- Length of the insurance term.
- Your age.
- Your relative health.
- Your biological sex.
- The death benefit of the policy.
- Credit history.
Term life policy premiums are generally inexpensive when compared with the premiums paid for whole life or universal life coverage. It is possible to get hundreds of thousands of dollars in coverage for between $30 and $50 a month (depending on various factors) in some cases. The affordability of term life coverage is what makes it so popular for young families. It is a way of protecting your family’s financial future, without paying a great deal. However, the trade off is that you won’t build cash value as you can with whole or universal life. Additionally, your term insurance coverage will run out, leaving you without coverage eventually.
How Much Life Insurance Coverage Do You Need?
For the most part, you only need life insurance if you have dependents that rely on your income. For most, that means those with young families whose children will need to be taken care of as they grow up. However, in some circumstances it makes sense for seniors to have life insurance, especially if there is a spouse relying on pension income or if the couple still has debt.
How much life insurance you actually need depends on your individual circumstances. There are numerous rules of thumb, telling you to base your insurance coverage on your yearly salary times a certain number of years, or having you look at your expenses and create an estimate based on that. In the end, though, it is up to you. Some things to consider when deciding how much coverage to get in a term life policy include:
- Debt (including mortgage) that needs to be paid off.
- Child care for your children.
- Your spouse’s ability to work if you are gone.
- Costs of raising children comfortable.
- Whether you want to cover a college education.
- How old you are right now.
- Assets saved up.
- Current salary and regular expenses.
Consulting a financial planner can be helpful as you look at your individual needs and determine the coverage that would work best for you.
This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.
photo credit: maveric2003
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