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How to Determine the Type of Life Insurance You Need

By Edited Aug 27, 2016 0 0

What Is Life Insurance?

Life insurance is a financial contract which transfers risk away from you and onto another company. What risk? Well, when you are alive, you accumulate debts. These debts would ordinarily be passed on to your spouse if they're incurred while you're married. This means your spouse could be responsible for debts she has no way of paying for. The insurance policy prevents this kind of scenario from happening.

Process

  1. Gather all of your financial data. You must know how much all of your bills and other expenses amount to.
  2. Add up your normal monthly expenses, plus any other future financial obligations you expect to have. For example, do you want to help your child go to college? This would be a future expense you must account for.
  3. Determine the length of time you must have the insurance for. Do you need life insurance for 10 years? 20 years? A good rule of thumb is that you only need life insurance until you've accumulated a personal savings capable of satisfying all of your outstanding debts and obligations. While you might think that your financial obligations end when you retire, don't forget that dying isn't free. You must have enough money to cover funeral costs and your burial.
  4. Analyze the type of life insurance policies on the market. This gets a bit tricky because there are so many. Term life insurance is generally used to provide temporary insurance coverage. It provide this coverage for a low premium cost relative to the death benefit you receive. Whole life insurance provides permanent death benefit coverage. You receive both the death benefit plus a cash reserve, called a cash value. This cash value functions like a savings during your lifetime that you can use for any purpose. The death benefit and cash value are guaranteed for your entire life as long as all premiums are paid. The policy matures at age 100, and the insurer will give you a check for the death benefit if you live that long. Universal life has elements of whole life and elements of term life built into it. Premiums are deposited into a cash value account. The insurance company then deducts money from the cash value account to pay for the death benefit and credits interest to the account. Premiums are flexible, and you can increase or decrease them over time. You can even stop paying premiums if there is sufficient cash value to pay the costs of the death benefit. 
  5. Add up all of your current income, and then subtract all of your monthly liabilitites. This will tell you how much money you have to spend on life insurance.
  6. Choose your policy. Choose the type of policy which will meet all of your financial goals and needs along with being affordable for you given your financial situation. If you want a policy that only gives you coverage for a maximum of 30 years, term insurance would be appropriate. If you want lifetime coverage with a cash value savings, whole life or universal life insurance could be the best fit for you.
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