While complicated by the sheer number of choices in the marketplace, the fundamental concept of life insurance is unchanged—financial stability for your family if and when you die. For families as well as individuals with dependents (i.e. a person or persons who depend on you for financial support) life insurance may be the most valuable purchase you make in your lifetime.
The life insurance marketplace is ever-changing and increasing in size and options. With so many products and variations available and so many ways to buy them consumers often are left scratching their heads about what to do.
Simplify the Life Insurance Buying Process
The following steps are designed to simplify the life insurance buying process. A systematic walk through these steps will help guide you to your goal: financial security for those you love.
STEP 1: Do I really need life insurance?
“Okay, so I have a family and/or dependents. What do I do now?” Good question! Now let’s answer it:
Although you may not realize it, the need for life insurance was created the very day someone in your life starting depending on you for financial support.
To many, the array of life insurance products available is intimidating. Too much selection actually deters some consumers from buying coverage. In addition, the complicated nature of insurance drives consumers crazy—leading to feelings of confusion, anxiety about what to buy and how much to spend.
While many variations exist, the two most common types of life insurance are based on simple concepts. They are Term Life and Whole Life insurance.
Term Life Insurance — Term life Insurance is sold in blocks of years (i.e. 30-year term). In exchange for a premium, term life policies promise a death benefit (i.e. $250,000 or whatever the face-value of the policy) if you die before the end of the policy’s term. The policy does not build cash value and the premiums increase over time as the likelihood of death increases. Most companies sell guaranteed level term, where your premiums will remain constant for the life of the policy.
Whole Life Insurance — As opposed to term life insurance, whole life insurance protects the policyholder for his or her entire life. The premium is usually higher than that of a term life policy. In addition to a death benefit, whole life policies are coupled with a savings vehicle so the policy accumulates cash value. This cash value can be withdrawn to pay for expenses or can be borrowed against – but do this sparingly. Any money withdrawn from your policy will require hefty interest payments, so you’re essentially paying interest to a company to borrow money from yourself.
STEP 2: What should I buy?
“What type of policy do I need and what will it cost?” Another good question. The answer:
Most life insurance policies are variations of Term Life or Whole Life policies. Depending on what you buy, premiums may change over time or stay the same. Step Two is to identify how much you can spend and which product or products fit your budget.
When budgeting for life insurance, it is important to remember a few things:
- Your needs will change over time. What’s right for you now may change depending on where life takes you. Changes in income or finances, the birth of a child,or the purchase of a new house are examples of factors that can change your needs over your lifetime and have an effect on your budget for life insurance.
- With life insurance, something is better than nothing. If you like the idea of a Whole Life policy but cannot afford it right now, a Term Life policy may be a less-expensive alternative. At least you’ll have some coverage. Remember though, that life insurance is rated based on your age, so acquiring coverage sooner is definitely cheaper than waiting.
Knowing how much life insurance to buy can be tricky, and you may prefer the assistance of a life insurance agent to determine what you need. If you prefer to research yourself, a life insurance calculator is a valuable tool. This tool will help you measure important elements of your current financial status, including net worth, assets and liabilities. It also will help estimate future expenses, such as college tuition and funeral expenses. The calculator will use this and other information to help you determine an adequate amount of insurance. There are many life insurance calculators available online. An excellent example is found at MSN Money.
STEP 3: Watch out for dust!
“How often should I review this stuff?” More than you think!
Review your life insurance often, at least annually. Changes in income, number of dependents and lifestyle are all things that can alter your life insurance needs. The policy you bought years ago may be collecting dust in a drawer somewhere - not an ideal situation for such an important part of your family’s financial security blanket.
Periodically reviewing your coverage with your family and your life insurance agent is essential to determine necessary changes that can keep you from being underinsured. Similarly, such review also can identify areas where you may be overinsured and thus save you money.
CONGRATULATIONS! You’ve crossed the life insurance process finish line!
Hopefully, the preceding steps will help simplify your life insurance buying process or at a minimum get the process started. Keep in mind that the sooner you decide to buy the better because life insurance companies historically offer more favorable premiums to younger, healthier applicants. The time to buy your policy is now. So get your life insurance today before it’s too late!
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