Life Insurance 101

If you don’t already have a solid life insurance policy, you probably have your reasons.  It’s too expensive, you could do better things with your money, it’s too complicated, you’re young and it’s pointless to buy it early, you’ve got it through work, or perhaps you just never got around to it.  These are common and intuitive ways to think about life insurance.  But they don’t acknowledge the importance of preparing for the worst and protecting the people who are most important to you.   Life insurance provides an extremely valuable safety net for the people close to you who would be affected by your death and the sudden change of direction their lives would take, no matter how old you are and what your life situation is.

Imagine that you just died.  Think about everything that would happen.  If you’re married with children, half of your income has just disappeared.  Maybe your spouse has to take care of the kids so he or she can’t go to work, or perhaps your spouse is so devastated that going back to work seems impossible.  Even if you’re not married, you’ve still got a family to take care of.  There would be all kinds of expenses or debts that would become a burden to your family immediately after your death.  If you’ve been supporting anyone close to you financially, they’ll be suddenly left without your assistance.  This is why life is insurance is so important; in the wake of complete devastation and sudden changes in their lives, the people you love most will at least take comfort in the knowledge that they’re covered. Life insurance isn’t just a luxury people buy for convenience and a vague sense of comfort.  It’s an essential way to provide security for loved ones who would otherwise be left in the dark after you’re gone.

So where to start?  First, know the basics.  With life insurance, you’ll pay a flexible premium for the term of the policy.  If you die during the term of your policy, your beneficiary will receive a fixed amount of money.  Your premium is calculated based on the risk of your death; the main factors are age, sex, and pre-existing medical conditions.  This means that current medical problems, smoking, and even dangerous hobbies can drive up your premium.

Life insurance is broadly categorized into two types: term and permanent (often called “term and “perm”).  With term insurance, the policyholder is covered for a set number of years, usually from 10 to 30. This is generally the cheapest form of life insurance; however, it has its disadvantages.  If you die after your term expires, your beneficiary will receive nothing.  Also, your premium is subject to change after every term, and it will likely increase as you get older. Lastly, term life policies have no cash value, meaning that they don’t accrue interest and you can’t borrow money against them. Permanent life insurance, by contrast, will cover you until the day you die.  It also includes a cash value component, meaning that your insurance company will invest the money from your premiums so that your policy will accumulate value over time.  Permanent life also carries the benefit of a fixed premium, meaning that a cheaper premium for a young policyholder won’t increase over time.  The main drawback of permanent life insurance policies is that they tend to have higher premiums.

So what kind of policy is right for you? Finding the appropriate policy means thinking about what and whom you would need to cover after your death.  If you’re single, think about your debts, future expenses, and loved ones.  Make sure your policy includes a portion that would cover anyone who is dependent upon you, would have to pay off your co-signed loans, or would be responsible for your funeral costs.  If you’ve got a family, you need to think about what your spouse’s financial situation would be without your income.  Make sure to include any significant expense, such as a mortgage, medical bills, legal fees, or other debts. If you have children, imagine them growing up and all the expenses that would accumulate; this would include childcare, health care, education, and all sorts of other costs. You also need to factor in retirement and estimate what your family will need once your spouse no longer has an income.  All of these expenses add up to an amount that is often higher than what most people expect. This means that you should spend time with your insurance agent to figure out a reasonable amount of coverage.  It also means that you should take a second look at your life coverage from your employer if you’ve got it, as work life policies tend to provide an inadequate amount of coverage, and you often can’t keep yours if you leave your job.

Once you’ve got a life policy, it’s important to pay attention to it rather than just ignore it.  Reviewing your life insurance every few years helps make sure that your coverage is still appropriate and your premiums are the best they could be.  Significant life events such as getting married, having a baby, or going through a divorce will likely change your finances to the point where you need to reevaluate your coverage.  An unexpected increase in income such as a raise or inheritance may reduce your need for a high death benefit, so it might be a good idea to convert from a whole life policy to a cheaper term policy.  Declining health will raise your premiums for term life insurance, and you might also need more insurance or a different mix of insurance.  In the event of a serious illness, it’s a good idea to review your policy to see if it offers any accelerated benefits to help you out.  If you’ve recently made significant improvements to your health, such as quitting smoking or managing your blood pressure, you may qualify for a better health class and could reapply for a lower premium.  It’s quite likely that many of these life changes will apply to you over the course of your life insurance term, so frequent reviews are necessary to make sure that your life policy reflects your current life situation.

Taking all of this information into account, we end up with a few general tips to get you started when deciding on a policy.  First, understand the importance of life insurance and what you want your policy to do for you.  It might be difficult to imagine all the grim consequences that would come with your unexpected death, but really thinking about these contingencies is the only way to ensure that your life policy will do what it’s supposed to do.  Second, take the time to calculate your death benefit. Work closely with your insurance agent and be prepared to come up with a number that is higher than you expected. You will probably be able to change your policy in a way that’s convenient for you, but it helps to look as far as you can into the future in order to feel confident that your initial coverage is suitable and durable.  Lastly, don’t forget about your life policy after you buy it. Think about the effects of your sudden absence as the years go by and make the corresponding changes to your policy. This will make sure that your life insurance responds in a way that offers a vital helping hand for your loved ones in the event of a tragedy.

M.E.

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