Achieving your financial destiny requires financial planning. A solid financial plan must take into account the good and bad times of a person’s life. Buying life insurance is an account of the possible bad times during a person’s life and is the main reason to buy life insurance. Yes, you said those three mean words, “buy life insurance.” A life policy is the foundation of any solid financial plan.
Life insurance basics
For many people, life insurance is seen as something they will buy “someday.” Most people know they need some life coverage, but they don’t take the time to do basic research.
First of all, life coverage is intended to replace income if the spouse or parent dies prematurely. If you and your spouse generate any kind of income, it must be protected. Most families today need income from both spouses, regardless of how much they earn to meet their lifestyle needs.
Life coverage takes effect if one of the spouses dies prematurely and income remains essential for the family. Most financial experts recommend that a person be paid 5 to 10 times their annual salary. This is not a hard and fast rule of thumb, but this number will give you a starting point in determining how much it covers.
Life insurance is not intended to be your retirement plan or your children’s college fund. If your financial advisor sells you a policy to meet these needs, you should consider getting a second opinion.
Types of life insurance
For spouses, when reviewing life policies, you will find three common types of life policies: group insurance, cash value insurance, and term insurance.
Group insurance is the simplest explanation. Group term insurance is the combined life insurance that the employer will provide to the employees. Life insurance covers an employee only while they are working. Typically, coverage is only one or two times the employee’s annual salary, which does not meet the recommended annual salary of 5 to 10 times. This type of insurance is good bonus insurance and should not be your primary insurance.
Group insurance will be the least expensive since the amount of coverage is small and there is little to no approval process.
Cash value insurance
The second type of life insurance goes by several names: whole life insurance, permanent insurance, or cash value insurance. With cash value insurance you have two different amounts of coverage. The first is the notional amount or the actual coverage that beneficiaries will receive. You also have a second quantity which is the monetary value. The monetary value grows over time and recipients will receive the notional amount and the monetary value based on the selected payment method.
The whole life has become popular again in the last decade due to the low returns of the stock market. However, as mentioned above, life insurance is not meant to be your retirement account, but rather to protect income. There are much better places to save money for retirement, like the Roth IRA.
Of the three types of life insurance policies, cash value insurance is the most expensive.
The last type of life insurance is term insurance. As the name implies, your coverage is established for a specific period of time or duration. The validity period can be less than one year up to 30 years or more. At the end of your term, you can reassess your life insurance needs to find out how much you need at that point in your life.
A common term for many families to buy is 20 or 30 years. A 20-year period should take you past the years of your maximum responsibility, but to be sure, 30 years should be enough.
One tip to keep in mind regarding term insurance is your end-of-term options. You want to search the policy itself for a guaranteed policy that can be renewed without medical questions. The reason is because we never know what our health will be like 20 or 30 years in the future, so having a foolproof renewable policy is vital to your financial plan.
Many of the cheaper term policies require that you be reinstated for life insurance at the end of the term. This means you must answer medical questions to continue coverage.
Term insurance will cost more than group insurance, but is generally 2-3 times less expensive than cash value insurance. However, don’t just consider cost as the only factor. You should use the recommended amount of 5-10 times your annual salary to get a figure that adequately protects your family. Find the amount of coverage you and your partner need, and then the cost.
What the experts say
I never like to listen only to financial advisers or insurance agents. I’d love to see what third parties have to say about the topics. When it comes to life policies, most third-party companies or individuals will recommend: Term insurance. Read financial magazines like Smart Money and Money Magazine, books by Dave Ramsey or Suze Orman, or newspapers like The Wall Street Journal or USA Today to get a second or third opinion.
These sources mentioned at one point or another that term insurance is the best way to protect your family.
Life insurance is the foundation of a financial plan and the family depends on income to make the financial plan a reality. Take the revenue and then the plan collapses. Life insurance helps protect the financial plan if one of the spouses dies prematurely.