Some people believe that having life insurance -- planning for their death -- will bring misfortune to their lives, and would rather not have any at all. Unfortunately, too many people don't realize the importance of life insurance until it's too late.
Life insurance protects those who depend on your paycheck, such as your wife, children and quite possibly, your parents. If you die prematurely, life insurance can provide ongoing income to your dependents, until they are able to live comfortably without it. It can also provide emergency support for legal, medical and funeral costs, should family savings not be sufficient to cover them.
who needs life insurance?
A single individual -- or someone who's one-half of a two-income, no-dependents household -- won't likely need an abundance of life insurance, if any.
Remember; life insurance is not a state lottery. Its purpose is to cover any unexpected costs that a family unit cannot afford or that would put the family's financial situation in peril. At this stage in your life, the main concerns to plan for are funeral costs, and unexpected estate taxes.
On the other hand, if you're the sole breadwinner for a large family, with little savings, then life insurance is essential. Once basic items such as shelter and food are covered, life insurance should be next on your list of priorities.
Imagine yourself gone tomorrow; what would the immediate impact on your family be? Are they counting on your paycheck in the years ahead to cover basic needs and future savings goals? Could they afford the funeral costs? Who would pay the home mortgage? Would your family be thrown out on the streets?
At this stage in your life, if you still don't have life insurance, maybe it's time to consider getting some -- not for your sake, but for your family's.
which plan should you get?
In general, there are two basic classes of insurance to choose from: term life insurance, and universal or cash value insurance.
Term life insurance is just that -- life insurance, and nothing more. The premium payments are applied 100% to the cost of the insurance.
As retirement approaches, the need for life insurance is likely to decline, as children become able to support themselves and retirement savings begin to approximate a lump-sum life insurance payment. At this point, term insurance can easily be dropped.
the advantages of term insurance
Simple
Term life insurance, much like car insurance, is the essence of simplicity -- pay the premium, get covered for the term.
Competitive prices
Because of their simplicity, term life policies can be easily compared on the basis of price alone, which has effectively led to extremely competitive prices.
Flexible
Most term policies are very flexible, allowing for both renewable (you can renew for another term policy without a medical exam and convertible terms (convert your term policy into a universal policy).
Maybe you're better off with universal insurance instead?
universal insurance
The second class of life insurance -- universal insurance -- includes a wide variety of financial products. These products combine term life insurance with a long-term, tax-sheltered savings plan. The important thing to understand about universal policies is that they're designed for life.
Here's how a universal plan works. A portion of your premium payment is used to pay for the life insurance alone. The balance, less management charges and commissions, is applied to your savings or investment account.
The cash value savings goal provides additional income during your golden years to cover insurance premiums.
why consider it?
Insufficient retirement savings
If you don't have a separate plan for retirement savings, you may want to consider a universal policy.
Tax-efficient estate planning
This is a very complicated topic and well beyond the scope of this article, but if you want Uncle Sam's hands kept out of your estate, you might want to consider a universal policy as a way of bypassing the tax man.
Forced savings
By adding a savings component into a bill that must be paid, you'll be ensured a guaranteed savings discipline. However, considering that you can ask your bank to automatically transfer funds into a reinvestment plan, a universal policy can be an expensive way to save.
which one's better?
People have their own needs, but I personally recommend term insurance. Leave the investment component for your financial planner or invest it yourself, and keep your life insurance policy as what it's meant to be -- an insurance policy.
how much coverage?
So you finally decided to get insurance. The only other important issue left to take care of is how much insurance, and for how long? The easiest way to approach this is to ask yourself: if you're the primary caregiver to dependents, what will it cost to replace you with a paid provider, and for how long?
The most basic way to calculate your insurance needs is to replace your annual income until you retire. Start with your current annual before-tax salary, and estimate how many years left until retirement.
Once you have these two numbers, you can figure out how much insurance your family will need in order to replace the lost income should something unfortunate happen to you.
For example, to replace a salary of $35,000 for 25 years, you're going to need at least $575,000 of life insurance coverage.
get a professional opinion
A lot of people buy life insurance without doing the proper research, or without having a clue as to what they're really buying. A slick insurance salesperson can take advantage of these circumstances and prey on an individual's emotions in order to sell them the most expensive options.
Before sitting down with an insurance salesperson, invest the time and money in an estate-planning attorney to make sure you're getting exactly what you need for your specific situation.
Call Chris Campbell
Farmers Insurance Group
816-285-9483
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