Let’s face it, nobody wants to think about dying. And not too many people spend a lot of time thinking about what happens after we die. As far as most of us are concerned, the world pretty much stops on the day we leave it. But what we do with our lives can have grace repercussions after it ends. We leave behind spouses and children, and bills for them to pay. Remember, when you die, your family not only loses a spouse and parent, they also lose your income and earning ability. And for many families, that can be catastrophic. So it is important that all adults have adequate life insurance. But if you don’t have a policy, how do you shop for one? There are thousands of policies available and the sad fact is that most people have the wrong kind of insurance for their needs: overpriced policies designed to bulk up an insurance agent’s commission while giving the buyer poor value. But some simple pre-planning can help you work out what kind of policy is best for you. Following these steps will help:
1) Consider how much insurance you will need. An insurance policy should do more than just pay for your funeral; it should also provide a means for your survivors to continue their lifestyles without excessive financial burdens. Do you have a mortgage? Credit cards and car payments? Are your children in college, or will they be attending college in the future? These expenses will continue if you die before they are settled, and you should plan for them. Calculate about 8 to 10 times your current annual salary to establish a base figure for estimating your needs.
2) Start early. Don’t spend too much time trying to decide whether you need life insurance or not. You do. And the older you get, the most expensive it will be, so lock in a good, long-term policy when you are young. Waiting too long also increases the chances that you may contract a medical condition, like cancer, that may render you uninsurable, so don’t delay.
3) If you didn’t already have enough reasons to quit smoking, here’s another one: next to your age, tobacco use is the leading factor in determining the cost of life insurance.
4) Consider a family policy. If you insure your spouse at the same time as yourself, you get double the protection, and many insurance companies offer discounted rates for spousal coverage. You can also insure you children in the same policy, usually as an inexpensive rider to the policy.
5) Right vs. wrong. What is the “wrong” type of insurance. To understand that, you must realize that all life insurance policies, no matter what bells and whistles are used to sell them, are one of two basic types: Cash value and term insurance. Cash value, sometimes called whole life, variable life, or universal life, covers you, like the name says, for your whole life. The downside is that you have to pay for it for your whole life, which can be cost prohibitive after you retire and are living on a diminished income. They usually come packaged with “savings accounts”, which is just a low-level investment of a portion of your overcharged premium. The savings accounts generally have a smaller rate of interest than the average Certificate of Deposit and, unlike your savings account at a bank, you get charged interest for withdrawls. When you die, you family gets the stated death benefit, but the insurance company keeps the money in the “savings account”.
Term life, on the other hand, is temporary protection. The policy remains in effect for a stated number of years, and then expires. Most term policies can be renewed, but usually at a higher premium, due to the advancing age of the insured. Term insurance is less expensive than cash value, and the money you save on a less-expensive policy can be spent on an investment strategy that will give you a superior return than the meager rates offered by most cash value policies.
Although term insurance has been proven time and again to be the superior value, most people buy (and are urged to buy by insurance agents) cash value, under the perception that they will have a greater need for life insurance when they are older (and closer to the end of their lives). But how true is this? Consider our final point:
6) Your needs will change. When you are younger, you often accumulate the debts listed above: mortgages, credit debt, higher education costs. But if you plan carefully and address the management of those debts when you accumulate them, they can be eliminated as you grow older. If, by the time you retire, you have paid off your house and car, reduced your credit card balances, and seen you children graduate from college and become self-sufficient, how much need do you really have for “income protection”, especailly if you no longer have an income and are living off your retirement savings? Can you actually reach the point where you don’t need life insurance? That goal may be more attainable than you think.
In short, the best insurance protection you can provide for your family is a level term policy that will cover you and your spouse up to your approximate age of retirement, coupled with solid retirement and debt-management planning. Consulting a financial planner can help you in the long run and help you custom-tailor a plan to your individual needs and goals. None of us knows exactly when our time will come, but we can plan for the aftermath better than most people realize, and the toughest part of the process is often making the decision to do it.