Many consumers do not have life insurance. In fact, a good number of people question whether or not it is actually necessary for them to have it. It’s important to note that life insurance is not necessarily useful to the insured, but rather for the beneficiaries that person leaves behind.
One reason many people do not have life insurance is because they feel it is too expensive. However, there are choices between whole life and term life that can make buying life insurance very cost effective. The idea behind having life insurance is to provide for final expenses and be able to leave something behind for loved ones. In short, people should consider buying life insurance if there is anyone depending on them for financial support.
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Different Types of Life Insurance
There are many types of life insurance, all of which are designed for different purposes. Even so, all types of life insurance policies come with similar exclusions to coverage. This means that buyers should always read over a policy very carefully before signing. They should also become familiar with the following definitions concerning whole, term, variable, and universal life coverage.
Whole Life Insurance
A whole life policy is one that you have for your entire life. This type of policy costs more than a term policy because beneficiaries are virtually guaranteed to receive some sort of payout. In most cases, whole life insurance policies come with a fixed rate, which means the covered individual will pay the same amount of money each month regardless of how long that timeframe might be. Whole life policies also accumulate what is known as a cash value, which can then be paid to the holder as dividends or applied toward premium payments. Even though a whole life policy is intended to last for life, an individual may always cancel his or her coverage at any time.
Term Life Insurance
The least expensive type of life insurance is term life. It provides very basic coverage, with the amount selected being the same amount paid to a beneficiary. For example, if a policy is worth $200,000, the beneficiaries will receive that amount upon payout.
Term life is no-frills coverage, meaning that unlike other policies, there is no cash value involved. That is one reason why term life premiums tend to be the lowest. Buyers may select different terms such as ten years, 20 years, etc. and the premium will go up or down based upon the length of time chosen.
A disadvantage to term life is that those who survive their term do not receive any death benefit. That means that any premiums paid during that time are simply gone. Of course, those who wish to can simply purchase another life insurance plan once their term is up.
Variable Life Insurance
Similar to whole life, variable life insurance comes with a twist, which involves some flexibility in its cash value amount. The returns on the cash value amount could actually cause the death benefit to be higher or lower than anticipated. As such, a variable life insurance policy is best suited for someone who is willing to take on a bit of risk. Individuals may also borrow against a variable life insurance plan, making it ideal for anyone who is interested in alternative methods of financing.
Universal Life Insurance
A universal life plan is very similar to whole life, yet comes with some added flexibility. Not only can consumers add cash value to their policy, but they may also borrow against it. The cash value account provides very little risk and has a high potential for return because it earns market rates.
Another type of universal life insurance is universal variable life. Similar to universal life insurance, it provides the opportunity to invest its cash value in stocks, bonds, or money markets. Universal variable life comes with higher premiums, but does allow people to borrow against it when needed. A universal variable life policy may also be cancelled at any time.
Who Should Buy Life Insurance?
Those who are wondering whether they should purchase life insurance should first think about their primary purpose for wanting it. Generally speaking, life insurance does not provide any direct benefit to the purchaser because benefits are paid only upon the policyholder’s death. Accordingly, the biggest reason for buying life insurance is to allow for some type of financial benefit to loved ones.
The cost of a funeral and burial can be as high as $20,000. Most people do not have this type of cash on hand, meaning that a family member often has to absorb the cost of final expenses. This is why financial experts recommend that everyone has at least enough life insurance to cover a funeral.
Individuals should also ask themselves whether or not someone is financially dependent on them. Dependents are often thought of as being children, but may also be a spouse, parent, or anyone else who is reliant on another person financially. Most people believe that the primary purpose of life insurance is to reduce the financial hardship someone might face as a result of their passing. This is particularly important for anyone who provides the majority of income for a particular household. However, those who are staying home to raise their family should also think about the value of services they provide as well.
How To Determine Life Insurance Benefits
How much life insurance is really needed? A great deal will depend upon the needs of the beneficiaries and the lifestyle of the insured. For example, a single person with no dependents and very little debt really needs just enough money to cover final expenses. However, those who have loved ones with disabilities or special needs should consider how much their care might cost and plan accordingly.
Another factor that will determine how much life insurance is needed involves how financially responsible a person has been while he or she is alive. A good rule of thumb is to take out a life insurance policy ten times greater than your gross annual income if you are the primary source of income. Doing so will ideally allow your family to continue enjoying the same lifestyle to which they are accustomed while they adjust to no longer having you with them. It will also give your dependents more time to become more financially independent, particularly if they are still minors.
Many people wish to purchase enough life insurance to provide for their beneficiaries for the rest of their lives. This is something that can be very worthwhile in many instances. It will take some careful calculation to determine future income potential and take the inflation rate and any possible investment interest into consideration.
Stay-at-home parents often believe they do not need life insurance because they do not provide any household income. That does not mean that their time is not valuable and that money would not have to be spent to replace it. Stay-at-home mothers should consider the cost of childcare, housekeeping, laundry, and other services that might have to be paid for out of pocket if they were no longer there.
The amount of debt makes a difference as well. Buyers should consider the amount of their income as well as their mortgage to determine if their family could survive in their absence. What about college expenses for children or even a spouse who may need to go back to school in order to obtain a better paying job? Think about any disabilities a dependent may have and how much it would cost to provide long term care. All of these things should be weighed very carefully when determining the amount of life insurance to purchase.
Buying Life Insurance: A Selfless Act
Buying life insurance is a selfless act that does not benefit the insured whatsoever. However, it can have a profound impact on the people left behind or even a favorite charity. A carefully-structured life insurance policy will allow beneficiaries to handle the cost of a funeral and burial without enduring a significant financial hardship. It may also provide them with some money to live on in the interim.
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