Should You Buy Life Insurance?

Trying to decide whether or not to invest in life insurance can be a daunting task. The answer is not always straight forward. For those just starting out, life insurance may not be a high priority, while for those who may be considering starting a family, life insurance is likely to be a very important investment, even if they don't yet realize it.

Life insurance is intended to replace the income of the person who dies, at least for a period of time. Which is why it does not typically make sense for someone who is single, and has no dependents to purchase life insurance. It also usually doesn’t make sense to purchase life insurance for a child, unless the child has a substantial income (like a child star). However, it could help cover all or most of your burial expenses. Ideally, life insurance will help protect your family should something unexpected happen to you.

Some people are fortunate enough to be covered by life insurance provided by their employer. These policies are typically very small and may not be enough to even cover funeral expenses and in some cases, the employer may be the sole beneficiary (this is usually the case with high revenue producing positions).

Therefore, it is essential for you to discuss your life insurance needs with a competent insurance agent or financial adviser before you are older and truly in need of a policy. While you are young you are able to purchase insurance policies more easily, typically with no medical screening required. Another of purchasing a life insurance policy before you absolutely need it, is that you may be able to lock in a lower rate, and save yourself a lot of money in the long run. If you know you intend to have a family in the future, it may be worth considering investing in a life insurance policy now.

Know Why Life Insurance May Be Necessary

Before you purchase a life insurance policy of any kind, it is essential to understand why you may need life insurance at all.

Even if you are fortunate enough to have substantial insurance coverage offered by your employer, a separate policy, that you pay for yourself, will protect you even if you lose your job, change professions or if your company simply stops offering the coverage. It is never a good idea to have all of your financial eggs in one basket.

Life insurance can provide a financial safety-net for your family in the unfortunate event of your death. If something unexpected were to happen to you, your life insurance policy could cover daily living expenses, pay down debt, pay the mortgage, or even cover college tuition or fund a retirement plan for your significant other. This offers a level of financial security that offers real peace of mind for those you leave behind.

At the very least, a minimum life insurance should cover the costs of your funeral and any burial expenses incurred after your death. Thus relieving those you leave behind of those burdens and the stress associated with them.

Determining How Much Insurance You Need

The money your beneficiaries are paid from your life insurance upon your death is known as the "death benefit."

Sometimes it can be complicated to determine how much life insurance is the right amount. You want to ensure adequate coverage, but you also do not want to pay for excessive coverage, which could be costly. A typical method used by financial advisers to calculate a rough estimate is to take your current annual salary and multiply it by ten.

On the surface that may seem like an excessive amount, but remember that your beneficiaries may need to live on that amount of money for a long time. It could be quite a while before they find a way to replace the income you provide, especially if you are the primary "bread-winner". You should also consider that this basic calculation does not account for inflation and the declining value of the dollar. The best way to determine how much life insurance will be enough is to discuss your personal needs with your insurance agent or financial adviser. Ideally, you should find a fee-only adviser that you trust.

Which Type of Policy is Right for You– Whole Life or Term Life?

There are typically two options for life insurance policies.

Term Life insurance may offer more affordable premiums. However, the policy does not build any cash value. This basically means that the policy is not worth anything unless you die during the policy term, at which time your beneficiaries will collect the death benefit. The policy is also only in effect for a limited "Term" (e.g.: 10 or 20 years), after which you lose any benefit and must buy a new policy.

Whole Life policies have costlier premiums, but the policies will build cash value over time as you pay the premiums. That cash value can then be borrowed against or the whole policy cashed in and you can use the lump sum of cash for whatever you see fit. Whole life policies last, as the name implies, your whole life, so long as you continue to make the payments.

The Decision is Yours

Although many companies offer life insurance coverage to their employees as a benefit, it is also important to analyze and discuss the financial needs your family will have so that you can properly plan for the future. It is always best to be prepared in the unfortunate event of the loss of yourself or a spouse.