Once you understand where you are financially (see my last two articles on Net Worth and Cash Flow), you should consider protecting your family. Purchasing life insurance is a solid financial decision. However, because every family’s circumstances are different, choosing the best policy requires some planning and research. There are some basic questions you can answer that will help get the process started: Why purchase it? How much do you need? Which type best fits your needs? Which companies offer the best policies? Let’s take a look at each of these questions below.
The most common use of life insurance is to ensure family stability after the insured has died. Life insurance policies can also be used to pay for funeral expenses, estate taxes, charity or the transfer of a business. There are many uses for life insurance; think about how you want your life insurance policy to work for your specific situation to determine how much and what type to use.
When purchasing life insurance to protect the family, carefully consider the projected annual living expenses of the survivors. If you have children at home, factor in the amount of lost income needed to sustain the household. For example, survivors usually need immediate help paying off the big bills such as the mortgage, expected college costs and other family expenses. Adding up these costs will give you the amount of insurance the family needs. These calculations should be done for each spouse to ensure that both have a death benefit sufficient to protect the survivor and family. Quick financial recovery from the stress of the death of a spouse leaves the survivor debt free and able to make an easier transition into the new life circumstances. Of course, a large number of variables will come into play here. Look holistically at your circumstances to best determine how much coverage you should purchase.
Life insurance policies are available as permanent or term. Permanent life policies typically pay a fixed amount upon death, and normally contain an investment vehicle that allows the cash value to grow, tax-deferred, over the life of the policy. You pay a fixed premium for the policy for as long as you own it. Term life policies don’t include an investment vehicle; they simply offer varying levels of coverage based on age, health, and desired monthly premium. With term life, you’re paying purely for protection.
Simply put, permanent life insurance is expensive and term life insurance is cheap. There are many other investments to choose from, so it’s not necessary to buy life insurance that does both. The goal is to provide indemnification (protection) in the event of a death. For family protection term policies provide the most protection for the least cost.
There is no shortage of companies selling life insurance. Fortunately, there are agencies which rate those companies on things like financial strength and willingness to pay claims. Stick with companies which get top ratings from Standard & Poor’s and A.M. Best.
Answering these basic questions should give you enough of a head start to have an informed conversation with an agent or financial professional about your exact needs, and the types of life insurance products available to match them.