Thinking about Life insurance
Many people do not want to talk about life insurance because we must envision our inevitable death and all the sadness around it. However, the events around our death may be one of the most important moments which we must plan for so our dependents will not suffer additionally. If we do not take care of this issue, not only will our dependents suffer emotionally but also financially. This a very vulnerable time for our dependents and we must protect them while we are living.
I was a life insurance customer representative and talked to thousands of people regarding their policy. I also helped them through when a loved one passed away. After a family member passes away, it is a very confusing time for relatives. It is important to understand what life insurance is all about and the important roles it plays in peoples’ lives. Many times I had the unfortunate duty of informing callers the policy was expired or a recent payment was not made. Sometimes there was an expectation that the face amount was larger than what I quoted. It is a very sensitive time for all involved. This is definitely an event which must be prepared for thoroughly and not avoided. It is very important that beneficiaries ( the persons receiving the funds after the insured dies) knows exactly what to do during these upsetting days.
Purpose of Life Insurance
The primary reason for getting life insurance is to take care of the monetary needs of your dependents in your absence. Dependents can be your children, a spouse, a disabled relative, or even your elderly parents. If you have young children and you are not well-off, then it is an absolute must to have life insurance at some level. Even those who don’t have children may want to consider getting insurance for a loved relative or a special someone in their lives.
Whole life
There are two types of life insurance: whole and term. Whole life will continue until your death or until the policy matures which will happen when you are between 95 and 100 years old. At that time the customer can receive their face value. I had about 3 clients who did this. Whole life should not be used as an investment plan for retirement. There are much better retirement plans specifically designed for this. Also, remember that the primary purpose of insurance is to better the life of your dependents. Once your kids grow up and are on their own, the need for insurance decreases.
Whole life is very expensive. This is especially true in one’s later years when one’s health is not so great. Whole life does build cash value but it is a lot less than one thinks. I had countless customers call me and were very surprised how low their cash value was despite paying years of heavy premiums. Cash value doesn’t work like a bank account. Cash value can be borrowed against or be cashed out by terminating the policy. The formula for calculating the cash value is complex.
In addition to that, whole life breaks down into 3 other categories: traditional whole life, universal life, and variable life. To compare all of these policies of various companies will require the use of a financial expert. It is much easier to compare term life.
Term Life
The best life insurance is term life. It is relatively inexpensive and provides decent face amounts for varying term periods. The time periods can vary from 1 year to 30 years. The reason it is more economical than whole life is because it does not have the cash value side to it. It is also cheaper because people are living longer and there are less claims.
The premiums will depend on your sex, age, smoker-status, state and general health condition. Younger will be cheaper than old, female less than male, non-smoker substantially less than smoker, and better health less than worse.
How Much Insurance Do You Need?
The general rule is get a term long enough until your children are able to stand on their own. This may be age 18 to 29. This would depend on how old your youngest child currently is. The amount would be your currently salary until that age.
For example if your youngest is 5 and you plan on providing till 25 and you will need a term of 20 years. If you currently make $40,000, then multiply that by 20. This gives an amount of $800,000.
Don’t forget that if you have been working for a number of years, the social security administration will also provide benefits for your child. For this number, simply go to the social security website and use their calculator. Use that annual number and multiply by the term. Then deduct that number from your face amount. If you have any other income sources or properties that you put in a will for your beneficiaries, that amount can be deducted as well.
Most people usually have too little insurance. Many times after an insured has passed away, the beneficiary will call and get upset about the face amount. They suspect the insurance company is holding back. They can’t believe the insured payed his whole life for such a low return.
How Much Insurance can you afford?
If you are well-off or have a good income this section is not necessary. However, for those of us already on a tight budget we must create a plan which will work for us. How much can your dependents live on minimally? Use a number which they could survive annually and use that to calculate your face-amount. If the premiums are still high you may have to decrease the term by a certain length until it is a number which will fit in your budget.
You may also want to shop around with different companies. Term life insurance is easy to compare and there are many independent insurance quoting websites. Just make sure to read the whole policy before deciding who to go with.
The cheapest source of life insurance will be group insurance provided by your employer. Group insurance will also be available through other organizations you may be a part of. Your bank or credit card company can also offer group insurance. If your finances are very tight, you may want to select a face amount on the lower end until things get better.
Selecting your insurance Company
The best companies will have strong financial ratings and have a long history. The better ratings are AAA (extremely strong), AA (very strong), A (strong) or BBB (good). This information can be found for free by typing insurance company ratings in any of the well known search engines. Even the history can be found by searching online for when the company was founded. A final check with the Better Business Bureau and your state insurance commissioner will reveal any major complaints.
In conclusion, life insurance should be a very important part of one’s financial plan. This is more true of those who have dependents. It is not a subject we should avoid despite its unpleasant aspect. It is something we plan for with care so our family is taken care off when we are gone.