Buying life insurance is one of the most important things you can do to ensure that your family can maintain their standard of living in the event something happens to you or your spouse. This article will help you understand the kinds of life insurance that are available to you and the pros and cons of each type.
There Are Two Main Types of Life Insurance
The two kinds of life insurance are whole life and term life. The differences in the policies primarily come down to the ability to accrue cash value and the length of the policy.
According to https://floridainsurancequotes.net/life-insurance/get-best-whole-life-insurance-quote-florida/, whole life policies have higher premiums than term insurance. These policies stay in force for your entire life as long as you continue to make your scheduled payments. These policies allow you to reinvest your premium payments into a variety of investments (stocks, bonds, money market accounts) so that as you hold the policy it builds up a cash value. One of the nice features is that, over time, this will allow your policy to have a cash value which could exceed the amount of your covered benefit. If you can afford to hold a policy until you retire, this cash value may provide a nice supplement to your income. This cash value (also called the surrender value) will only be available in its entirety if you hold the policy for a set period of times, typically 10-12 years.
There are other, less expensive investment options. So your first consideration with a whole life policy is if you will be able to afford the premiums over time.
As its name implies, term life is a type of life insurance that you hold for a specific period of time. Because the cost of the policy is just the cost of the insurance, and because there is no investment component, you can get a term life policy for significantly less than you would pay for a whole life policy. Many consumers find that they can purchase more insurance coverage which can provide additional peace of mind. You can generally define the number of years you want to hold the policy. For example, you may want to hold the policy until you retire, and then switch to a new, less expensive policy that would cover your empty nest in retirement. This is a difference from whole life which you would either have to cash out or continue to pay a high premium.
One caveat about term insurance, it is cheaper the younger you are. As you get older, the cost difference between the types of policies can narrow considerably, so it’s good to open a term life policy while you’re young.
How Much Coverage Do I Need?
This is a great question that doesn’t have an easy answer. A good rule of thumb is to consider the amount of insurance that you think your surviving spouse would need to live comfortably, them multiply that amount by the number of years you think they would need the insurance benefit. By this I mean, for example, that if you have a spouse that currently does not work, it is not unreasonable to expect that over time, they will want and seek employment, particularly as children get older.
So by this measure if you figure your spouse would need $50,000/year for about 5 years you would want to consider a $250,000 policy. But that’s just where your calculation starts; you also need to consider your current housing situation. Many people look at insurance as a way to ensure that their family can stay in their house. So you should make sure there is enough in the policy to allow the house to be paid off.
And parents with children also may want to ensure that there would be enough money to finance or at least begin to finance a child’s college education. That’s why you can start easily seeing policies get to $500,000 or even $1,000,000. You are not insuring yourself against what will happen, but what may happen.
Can I Afford It?
Life insurance is based on a risk premium. Simply put, insurers understand, and count on, many policy owners to outlive their policy. That means they will not have to pay out that $250,000 or $500,000 to every policy holder. This allows them to make premiums affordable.
Something to remember is that the healthier you are the better rate you’ll get. While this may not sound fair, you have to remember that insurers are insuring against predictable risk. For an insurer, this includes taking into account your overall health. People who are at a high risk for a life-threatening medical condition (e.g. if you smoke, if you are significantly overweight, etc) you will have to pay higher premiums then those that do not have those risk factors.