Term life insurance policy is a must have for anyone who has family and financial commitments towards the family. In general, a good insurance policy should be part of everyone's financial planning. Sadly, many people do not understand the importance of an insurance policy or just neglect to buy one. If you don't have a life insurance policy, you could land in deep trouble if unexpected things happen and your income stream stops. This article will guide you in buying a term life insurance policy that is right for you.
The Need for Insurance
Any insurance policy is a safely net. Be it life insurance, automobile insurance or insurance on any property or belonging that is your valued possession, having insurance can cover from drastic losses. Life insurance is even more special. If the head of the family doesn't have enough life insurance, in the event of his premature death, entire family depending on his/her income source could be in serious financial trouble. The main purpose of a life insurance policy is to replace the income stream that is stopped due to sudden demise of the family bread winner. A high networth individual who generate enough cash flow form the accumulated wealth does not need any insurance policy. Such people are called self insured.
How Much Insurance You Need?
The life insurance policy does come with a cost. You may or may not use it, but you have to pay for it. So, it is important to first determine how much insurance your family needs. The amount of life insurance you need totally depends on your future financial liabilities. Basically, the insurance amount should cover for any financial obligations such as daily family maintenance, kids education, mortgage payment, any outstanding debt payment etc. These obligations change from family to family and even from time to time for the same family. Another factor to consider is other income sources in the family. If there are other income sources, even after policy holder's income stream ceases, the amount of insurance could be reduced.
But, it doesn't have to be always complicated to decide the value of your life insurance policy. As a general rule of thumb, it is realistic to buy a term life insurance policy which is ten times the annual income of the policy holder. Here is the idea behind this number. Considering 10% annual return, this amount will produce an yearly income equivalent to policy holder's income stream that is discontinued. With that coverage, income situation of the family remains unchanged even after the death of the policy holder.
What is Term Life Insurance?
There are two main types of life insurance policies. Term Life insurance and whole life insurance. Term life insurance is a widely recommended insurance policy for various reasons. Let us first understand what a term life insurance is.
Basically, it is an insurance policy that has a term limit. Meaning, a person buys a pure life insurance( no cash value) that covers that person for certain number of years. After that insurance becomes void and doesn't have any value. Policy holder pays yearly premium to keep the policy active throughout the term. The premium amount is locked at the time of the policy purchase. Entire premium amount goes towards the insurance ( less commission) and nothing gets invested for the policy holder. At the end of the term, the policy holder has an option to renew the policy for a new yearly premium.This premium will be much higher than the previous one due to increased age factor. In some situations you can convert your term life insurance policy to a whole life policy at the end of the term. Of course, the terms and the premium will vary.
Why Term Life Insurance?
Term Life insurance is by far the best insurance policy for individuals. It costs much less than the whole life insurance policy. For example, a 40 year old non smoking man could buy a $250,000/- term life policy for around $300/- per year. A whole life insurance policy could cost about ten times more for the same coverage.
For many families, insurance is needed only for certain time. They many need insurance until their mortgage is paid off, kinds education is complete or they are retired etc. Term life allows you to choose that term and get the coverage for what you just need.
Unlike cash value policies, term life is only an insurance coverage. It doesn't bundle savings and insurance together. Savings though insurance policy is a horrible route to take. It is a real rip off. Term life doesn't have any of these overheads.
Term life policy expires after the term. You can choose your term based on the need and you end up paying for what you need and nothing more.
Less commissions and fees. Since this type of policy comes with no other string attached( such as investment or savings) it has very less commission and fees. Insurance should never be combined with insurance. There are much better ways to invest you money and reap greater returns.
Where to Buy Insurance?
Now a days buying a term life insurance has become very simple and easy. Most of the times, this can be done from the comfort of your home. There are several websites that allow you to compare many insurance options side by side. You can do your due diligence and chose the term life policy that is right for you.
Some of such websites are here:
If you need more help, you can always find a local insurance agent in your area who will walk you through the options you have and help you choose the policy right for you.
When you buy a policy from an insurance company, make sure the company is strong and stable. When it comes insurance claims, that's when you need your insurance company the most. They should exist and be able to process your claim in a timely manner. You can check the rating of an insurance company with the broker or check online with A M Best(www.ambest.com)