Very few people like to think about the inevitability of death. Fewer still will feel pleasure with the probability of an accidental death. In case you have to earn to take care of financial needs of someone, it can however be one of the unpleasant thought which you might want to consider. Here we take a look at two basic aspects of life insurance: first, we try to remove some of the misconception about life coverage and then we try to decipher a question which lingers in many minds, how much life insurance do I need?
Who needs Life Insurance Coverage?
It is not necessary that everyone should purchase life insurance. People who do not have any dependents, have considerable amount of assets to take care of their debts and for burial and funeral expenses, and then it does not make sense to put money in insurance. Even if a person has dependents but have sufficient assets to take care of everything, still you can do without an insurance coverage.
However, people who have dependents, significant debts, much more than the assets, then it is better to have some form of life coverage, to take care of your debts and for your loved ones in case something happens to you.
Insurance and Age
One of the biggest misconceptions perpetuated by aggressive insurance agents is that, it is difficult to get coverage as one age, so it is better to enroll when you are still young. But the fact is, the amount of money an insurance company will make depends on how long you live. For a young person, the premiums will be relatively low. In case an insured person meets a premature death, then it is a bad bet for the company.
Fortunately, and thanks to better living standards and advancements in medical field, the life expectancy have increased drastically in recent years, which means an insured person will continue to pay as long as he or she lives, and the premiums increases every year.
So when a person thinks of the question, “how much insurance do I need?” he or she should bear in mind that purchasing coverage at young age, although much more economical, but it is simply not easy to qualify for it. The fact is insurers will prefer to charge higher premiums to save them from the odds of covering an older person.
It is very rare that insurer will deny coverage to a person who is willing to pay for his or her risk category. Having said that, purchase coverage when you need it and if you need it, one should not purchase coverage just because of the fear that he or she may be denied later on.
Investment and Life Insurance
Many people view life coverage as a way to invest money, but when we compare it with other investment instruments, it doesn’t make sense, referring insurance as an investment. Certain life coverage is considered as way to save or invest money for retirement, popularly known as cash value plans. In such types of plans, the insured person builds up a pool that gains capital. This interest accumulates, just like in banks; the insurer pays a premium for using your money.
People who are looking for much better return can invest their money in index funds. People who are unable to maintain a regular investment, it will be beneficial for them to invest in cash value policy. But for people who can manage to behave like a disciplined investor, there are better way to capitalize on your money.
Term vs. Cash Value
In search for the answer to the question, ‘how much life insurance do I need’ one should also learn how their money is being used by the insurance company. Insurers prefer cash value policies and push them heavily by offering good commission to agents. In case you need money and wish to surrender the policy, the company may advise you to pick a loan on the savings and continue with the premiums.
Although, this may sound pleasing, but the fact is you will be paying interest for borrowing your own hard earned money, so it does not make any sense. Term insurance is a pure and simple coverage. The policy pays a set amount only on the death of the insured person; in case the insured person survives the policy he or she will not receive anything.
People purchase term coverage for the time they accumulate sufficient assets and they are done with all their responsibilities. Unfortunately, not every term insurance is beneficial in same way. Irrespective of the situation of a person, it is best to enrol in a convertible and renewable term plan. They provide good amount of coverage and are much more economical than cash value plans, and now as everything is available online one can easily find affordable rates.
The renewable feature allows a person to renew the policy without having to undergo the medical examination again and the rates are predetermined in majority of the cases. This means that in case it is found that the insured person is from a serious illness just as he or she runs out of the term, the policy will be renewed at a competitive rate.
With the convertible option it is possible to alter the accumulated value of the plan into cash value, as one turn the age of 65 and still feel that he or she can’t do without insurance coverage. Even though, many people who purchase this option always wish they never get to use this option but it is always better to be safe than sorry.
Evaluating, “How much life insurance do I need”
To answer this intriguing question, one should first find out how much money does their dependent need. Evaluating the face value depends upon:
– How much debt is pending: All the debts must be paid, includes mortgages, car loans, credit cards etc. For instance, a person to pay $200,000 towards mortgage, $4,000 for car loans, so your policy must at least carry $204,000 to take care of all your debts.
– Income Replacement: It is one of the biggest deciding factors in, ‘how much insurance do I need’. People who are sole earner for their dependents and your annual income is $30,000, your coverage should be able to compensate at least for that plus for a little inflation.
– Future Obligations: People who have to pay for their child’s tuition or have to move your spouse to Hawaii in case he or she is gone, one should also add this amount to the coverage.
Conclusion
People, who need life coverage, must be certain about “how much life insurance do I need”. However, in some cases, renewable term insurance can be sufficient, one should find out their own personal requirements. In case you are consulting an agent, do some homework and you should be certain about your requirements.
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