Believe it or not, life insurance is pretty important at any age, especially if you have a family that depends on your paycheck. So what is life insurance? It’s a policy you buy that protects the financial wellbeing of your remaining family members in the event of your death. In basic terms, it replaces your income when you pass away.
It’s been said that you don’t ever buy life insurance for yourself; you buy it for the ones you leave behind. Take my family for example. I work, my wife works, and my kids are 13 months and 3. Let’s say that the powers that be decide that I’m due for a higher cosmic calling and I experience a catastrophic flap malfunction while wingsuit flying in the Peruvian rainforest, ushering my departure from this earthly realm.
Without life insurance, my wife would have to pay for funeral expenses and shoulder the financial burden of our household with just one income. People manage a household with one income all the time, but life insurance would make my wife’s and kid’s lives as comfortable as possible in my absence. Let’s take a look at a few very important questions you should ask before buying life insurance.
Do You Need It?
Let’s just say for a moment that you decided to go ahead and pull the trigger on buying life insurance. You’ve seen the commercials, everyone you know has it – when in Rome and all that – but you haven’t really considered one very important thing: Do you need life insurance?
The Zing blog has covered this before, but if you’re the sole breadwinner of a family of four, with dependent children, then the answer is pretty clear. Without your income, your family will struggle. Will they be able to pay your funeral expenses? Will they be able to pay the mortgage? Food, expenses, utilities? Will they be able to save money for things like college or a down payment on a car? Even if the answer MIGHT be no, chances are life insurance is a good idea.
If you’re a dual-income household without kids, or if you’re single, the need for life insurance might not be too high. Before your passing, you can offset the cost of funeral expenses with a little financial planning in the form of a low-risk savings account.
Motley Fool also recommends considering a plan that will pay for taxes on investments should the need arise to liquidate some investments to cover expenses related to your passing.
Simply put, if you’re a young breadwinner with a mortgage, college tuition or bills that would need to be covered in your absence, you probably need life insurance.
What Kind of Life Insurance Should I Buy?
Life insurance comes in several shapes and sizes. Depending on your need, there’s most likely a policy out there that will provide coverage on terms that fit your situation. To learn more about the kinds of life insurance policies available, be sure to talk to an insurance agent or a financial planner for the coverage that’s best for you.
Let’s take a look at the most common options.
Term Life Insurance
With term life insurance, you receive coverage for a specific period of time. When you stop paying on your policy, you’re no longer covered.
If you pass away during the coverage period, the benefit is paid out. Unlike other forms of life insurance, term life insurance does not build cash value, meaning you can’t cash it out or borrow against it.
Permanent Life Insurance
Designed to cover you indefinitely, permanent life insurance policies don’t expire. These policies offer protection to your loved ones as long as you pay your premium, and unlike term life insurance policies, they do build cash value.
Within these two categories, you have a few other options. Within permanent life insurance, for example, you have the option to buy a whole life insurance policy that combines your policy with an investment fund. Universal life is another type of permanent insurance that’s a hybrid of term life insurance and a money market fund that’s tied to the market rate of return.
Once again, consult an agent or a financial planner to get a policy that’s right for you and your family.
How Much Do I Need?
Short answer: It depends. No two families are the same, and neither are their financial needs. How comfortable do you want your family to be after you’re gone? How old will your kids be when it comes time for them to go to college? How much do you make now? What’s your earning potential? How many years until you retire?
All those questions require serious consideration. Fortunately, as with most things that are variable, there are calculations that help insurance agents (and you) determine the level of coverage you and your family will need to not only stay afloat, but to thrive and prosper if you depart.
The calculation is called the Replacement Income Need or the Human Life Value – both pretty morbid when you think about it. But, let’s be real, we are talking money, life and death. Personally, if I’m planning for my family’s life after me, I’d want to buy the biggest policy that would ensure they were gazillionaires if I ever kicked the bucket. Formulas like the Human Life Value calculation remove the emotion and look at real numbers when factoring a person’s worth.
Am I Willing to Put Up with the Requirements?
Nothing in life is free. Life insurance is no exception. In addition to a monthly payment to your provider, you’ll have to do a couple things upfront to ensure you’re insurable.
The first is the application. You’ll need to provide basic information about who you are, where you work, where you live – you know, the usual. The requirements that throw most people off, however, are the more personal questions.
Some providers accept a personal information questionnaire to determine your eligibility. It’s important to be honest in answering these questions, however. If you’re not truthful, your premium could go up or your beneficiary might not have a valid claim against your policy.
The other way providers gather information about your health is with an in-person medical exam. For your exam, a paramedical will interview you about your medical history, ask about your family’s medical history, get a blood and urine sample, check your blood pressure, listen to your heart, check your height and weight, and ask about lifestyle habits that could affect your health.
For a lot of people, the idea of a person coming to your house and asking personal questions and taking samples of your blood and urine is quite unsettling. But without it, your provider can’t get an accurate snapshot of your overall health.
From there you’ll be approved for coverage or denied. The results of your exam will determine how much your premium will be. The good news is, there are a few things you can change that can reduce your premium. They’re covered more in depth in this Zing blog article, but the first is cut back or cut out alcohol use. Drinking puts you at risk for several health-related illnesses, and if your driving record has any alcohol-related violations on it, it shows that you’re a higher liability to the provider.
Things like high cholesterol, high blood pressure and diabetes are all related to obesity. If you lose weight, you lower your chance of developing any or all weight-related conditions, and your provider will reward your healthier lifestyle with a lower premium.
Non-smokers live longer than smokers. A longer life means a provider has a better chance of making back their payout in the form of premium payments. That makes you a better candidate for coverage.
If you’re willing to put up with the minor inconvenience of an exam or questionnaire, your family could live comfortably should anything happen to you.
It’s a Good Idea
Once again, there are several options out there in the world of life insurance. Fortunately, an insurance agent can help you find out if you need life insurance and help you find the best policy for your needs.
Long-term security is hard to come by. But with the right life insurance plan, you can secure a worry-free future for you and your family.
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