Before you purchase a life insurance policy, you want to decide:
- If you need life insurance
- What type of life insurance policy you should buy
- How much life insurance you need
Do I need a life insurance policy?
You should purchase a life insurance policy if:
- Others rely on you financially
- You have significant debt that others would have to pay off
- You want to provide money for a funeral
- You run a business that would need money to keep going if you weren't there
- You want to be able to build up and access cash value within a life insurance policy
If you're married, you and your spouse may rely on each other financially. If you die unexpectedly, life insurance can provide money for your spouse to make house and car payments, and pay other bills.
Whether you're married or single, having children is a main reason people purchase a life insurance policy. With a life insurance policy, you can set up a trust so that minor children can receive funds for everyday expenses and college.
You may have other individuals who rely on you. An aging parent or family member with special needs may need your financial help. A life insurance payout can support them after you're gone.
Small-business owners are strong candidates for life insurance. A payout can keep the business going without you. A life insurance policy could also fund a buy-sell agreement, which gives other business owners the funds to buy out your share and keep the business running.
Life insurance policy options
Life insurance buyers often look at term vs. whole life insurance. Each has benefits and drawbacks.
Term life insurance:
- Provides coverage for a specific length of time, such as 10, 20 or 30 years
- Has level premiums that don't change
- Is the cheapest way to buy life insurance
Who is it for? Term life is good for people who want to provide a financial safety net for their beneficiaries for a specific length of time. If you have financial obligations such as a mortgage or a child's college education to pay, you can buy term life to cover the amount and years of the need.
Permanent life insurance:
- Provides lifelong coverage as long as you pay the premiums
- The main types of permanent life insurance are whole life and universal life
- More expensive than term life insurance
- Has a cash value, which you can borrow from or withdraw
Who is it for? Permanent life insurance is for people who want their beneficiaries to get a life insurance payout no matter when they die. Some policy types are also for people who want to be able to access cash value within the policy, whether it's for surprise bills, paying a child's college tuition or to supplement retirement funds.
|Term life insurance||Universal life insurance||Whole life insurance|
|Coverage period||Set period of time||Lifetime||Lifetime|
|Premiums||Fixed||Flexible (with some types)||Fixed|
|Cash value||No||Yes (with some types)||Yes|
How much life insurance to buy
Factors that influence the amount of life insurance you need include:
- Your income, if you want the policy as "income replacement"
- Long-term debts someone else will have to pay, such as a mortgage
- Other debts you'll leave to others, such as credit card debt and car loans
For a quick life insurance needs calculation, you can:
- Multiply your annual salary by the number years you want to replace the income. If you are a stay-at-home parent, use the costs of child care or other services you provide that would need to be replaced
- Add your mortgage balance
- Add your debts
- Add any future expenses you want to cover, such as funeral costs or a child's college education,
- Subtract liquid assets such as savings, college funds and the amount of existing life insurance.
Choosing a company
When you're looking for the right life insurance policy, it's important to compare rates. It's the only way to guarantee you're getting a good price.
Look at financial strength ratings from A.M. Best and Standard & Poor's. They rate companies based on their ability to pay claims. These ratings are a helpful tool when comparing life insurance companies.