Life insurance is used to pay for funeral expenses and provide financial support to an individual’s friends and loved ones in the event of the insured’s death. While not everyone may need life insurance, it’s a good idea to purchase a policy if you are the main income in your household or if you have children living at home. Generally, the purpose of life insurance is to provide an income replacement in the event of your unexpected passing. Some policies are designed to pay off the cost of the funeral arrangements, while others also provide financial assistance to the deceased’s family in order to pay for living expenses and other miscellaneous costs. While there are several types of life insurance available for individuals depending upon their needs, many people choose a term life insurance plan.
What is Term Life Insurance?
Term life insurance is the most inexpensive life insurance policy option. You can select a policy term, during which coverage applies; at the end of the term, depending on the provisions of your policy, you may be able to renew your policy or have your premiums reimbursed to you. Every policy has its own terms as to what happens at the end of the term, however, and care should be taken to learn what to expect at that time.
How much Term Life Insurance do you need?
When selecting coverage, it’s important to decide how much term life insurance you need in order to get the best value for your family. As a rule, the younger you are the more insurance you will be eligible to take out. Additionally, individuals who are in good health and have no preexisting conditions will qualify for more insurance than those with existing health concerns.
Two factors should be considered when purchasing term life insurance: how long of a term to select and how much face value the policy should have. The term is the number of years coverage will last, while the face value is the amount of death benefits the insured’s family will receive in the event of the insured’s death.
To calculate the face value of your policy, you will need to know exactly what you want your insurance to cover. Do you want the policy to cover your funeral expenses? Pay off existing debt? Provide enough money to support your family until the children graduate college? Or until your spouse can retire? Be realistic when calculating how much you need, and balance that against the cost of the policy.
Be mindful that an increase of several hundreds of dollars in face value may only cost a few dollars more a month on a term policy. For example, you may be able to take out a $500,000 face value policy at monthly payments of $460, while a million dollar policy could cost just $645.
How long of a Term do you need?
After deciding how much insurance you need, you should decide how long of a term to take out the policy for. First consider any outstanding debts you have; you may wish to have insurance last past the duration of your mortgage, student loans, or any other long-standing debt. You will also want to consider any other milestones in your future, including when your children are due to graduate from college or when your spouse will retire. Also bear in mind that if you are young and healthy you may have an easier job of taking out a long-term policy than you will later in your life. That said, long-term policies will carry higher premiums than shorter terms.
Of course, individuals who are able to put aside savings or invest money on their own toward securing a future may not require as much insurance as those who do not have savings. Therefore, if you have been able to set money aside throughout the 10, 20, or 30 years of your term life policy, you may not require as much insurance coverage as you did when you were young and had less savings. Similarly, people who live debt-free and own their homes outright will need less insurance coverage than those who have substantial monthly bills.
Overall, deciding coverage for your life insurance is a balancing act between what you can afford, how much coverage you think your family will need, and how long you will need coverage for. The important thing is to balance your insurance needs with the amount you can afford to pay, and to include your insurance costs as part of your overall financial planning. When you choose a good life insurance policy, you can rest easy knowing that your family will be provided for no matter what happens.
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