You never know what life can bring in the future, when some accident can happen and how you and your loved ones will deal with it.
That’s why many personal finance experts describe purchasing a life insurance policy as one of the most impactful financial decisions you can make. It means to secure the future of your loved ones if you are gone.
Lack of knowledge about the types of life insurance—how much coverage you need, and how much it all costs—is often cited as the main reason why individuals do not have a life insurance policy.
If you are considering purchasing life insurance, here are some important things you should know before making your decision.
Know the State of Your Finances
To have a clear picture of how much your loved ones will need in the case of your untimely demise, you need to first understand what kind of support for them in such case you already have in place.
Any emergency funds, savings, retirement plans, investments, and so on. It is a simple necessity of understanding what kind of support your loved ones will have.
Additionally, you need to understand what financial needs your family might have in the case of an unfortunate event.
Mortgages, loans, and other debts will need to be repaired in addition to financial support for everyday life. But the financial goals of your insurance policy do not have to stop there.
Understand How Much Coverage You Need
Many people erroneously take into account only repairing the major debts, mortgages, house loans, and similar.
But in the case of death, your loved ones will be left with much more financial obligations on a day-to-day basis. Bills need to be paid too, and people tend to underestimate their contribution to covering the living expenses of their own families.
It is considered as a sound calculation to have the death benefits in the excess of 10x your annual salary. Your particular financial health and goals may require a higher or lower amount.
Life insurance can be used to also achieve some long-term financial goals, such as college funds, housing, or some other long-term need.
One way to go about estimating how much coverage you need is by using the DIME method. DIME is the acronym for Debt, Income, Mortgage, and Education; the sum of these categories gives you an estimate of coverage you need.
This category is your existing debts such as credit cards, car loans, and similar smaller debts that exclude major financial obligations such as mortgages.
In case of your death, your dependents will still have financial needs for a certain time. This is the estimate of the income your dependents will need for their life during that period.
Your remaining balance of all the mortgages you would wish or need to be paid off.
When calculating your life insurance policy needs, it is a prudent decision to take into account the future or current educational needs of your children, if you have them.
You can also try an online life insurance calculator like this one here.
Understand the Difference Between Term Life and Permanent Life Insurance Policy
Two main types of life insurance policies are term life and permanent life, and you will need to make an informed decision on which one is better for your circumstances.
- Term life is an insurance policy that lasts a certain number of years, usually between 10 and 40. It is a very straightforward arrangement, you are paying a small premium and, in turn, you are insured for a certain amount.
- Permanent life insurance on the other hand doesn’t have a fixed end-term and comes with substantially higher premiums. It has an advantage of the cash value it builds over time. In essence, the premiums you pay for it are split into two parts. One part covers the insurance while the other is accumulating value over time.
From this cash value, you can make withdrawals, but your death benefits will be lowered by that amount unless you repay it.
Understand the Rates
The two most important factors that determine your insurance rate are your age and health.
- The younger you are your life insurance will be cheaper to purchase (learn about the right insurance for your age).
- It is a simple principle, for insurance companies, it is a lesser risk to insure younger and healthier people, as such are less likely to die.
- Other major factors that influence how much you will pay your insurance policy are the type, amount of death benefits, and particular insurer.
Between individual insurers, rates can vary by a lot for the same type of policy and the same level of coverage.
Fortunately, many insurance companies provide easy to get quotes online, on their web pages. And you should use this option to find the one that best suits your needs and circumstances.
Monthly premiums can vary by as much as 30% between different companies, so it is a financially smart decision to inform yourself about the different options you have.
Premiums Are Not Most Important
Though the premiums are important because you have to fit them into your budget, they are not the most important thing you must take into consideration when purchasing your life insurance policy.
Finding an insurance company that will still exist when the day comes is arguably more important. One with high ratings from the independent agencies, such as S&P or Moody’s, should be the right choice.
If you are purchasing a permanent life insurance policy, the costs of such a policy are also an important component of your premium. For some policies, you also have a guaranteed and non-guaranteed components, which are often misrepresented by some insurance companies.
Get Ready to Answer Questions
The quota you can get from an insurer is just a rough estimate of a premium. When getting a policy you will need to answer a lot of questions that influence the final decision.
Besides age, height, and weight, you will be asked about your health history, mental health, medical history of your family members, driving record, exposure to various dangers at work and home.
Tell the Truth
Insurance companies can use third-party sources to acquire information about you that influences their decision when determining how risky you are to be insured.
Some may even require you to take a medical exam, including blood screening, and so on. So it doesn’t pay to lie on your insurance application, and it can lead to your policy being canceled in the future.
Having your life insurance policy application processed can take more than a few weeks, but many insurers offer an option of having temporary coverage while you are waiting. When choosing your insurance company, you should inform yourself about the existence of this option before making your final decision.
Buying a life insurance policy means providing financial security for your loved ones in case of your death. It can be called one of the most important financial decisions you will make in your life. So, you must know as much as you can about all the options available to you.
With such knowledge, you will be able to purchase a policy that best suits your needs but also ensures the future of your loved ones.