Few people enjoy the idea of discussing how much life insurance they need and what the ideal policy is for them. However, the truth is that having a good life insurance policy in place is very important. In fact, it can make the difference between your loved ones being able to move on, or simply having to move because they can no longer afford the mortgage payment without your income.
Why is Life Insurance So Important?
For starters, few of us go through life without acquiring any bills. A great majority of us have racked up car payments, mortgage payments, and credit card bills. This is in addition to the products and services that we use or purchase regularly, such as utilities and food. Many families today already have trouble making ends meet. So imagine your loved ones having to go it without your income, particularly in a single income household.
If we have any medical bills due to an injury or illness prior to death, your family would have to find a way to pay for these. In addition, the average funeral today costs between $8,000 and $10,000. Add that to the already steep mountain of bills, and your family may either need to drain savings or make some drastic adjustments to their living standards in order to keep up.
Plus, what about the cost of college? If you have kids that are planning to attend, they will be unlikely to afford the cost of higher education if there are no savings or income left.
And, while Uncle Sam isn’t necessarily our favorite relative, he may be asking for estate taxes when you pass on. For the year 2010, the estate tax has been repealed. But, if you’re not planning to check out until later, then you need to be prepared to plan for any estate tax liability you may have. This is because it’s expected that in 2011, the estate tax will be back and you could be liable to pay it on anything over $1 million in your estate.
Think about it. Your loved ones will have a hard enough time adjusting to life without you. A life insurance policy could allow your family to pay off the mortgage, pay your final expenses, settle your estate tax liability, and even send a child to college – all without having to make any additional major changes in their lives.
How to Choose the Right Life Insurance Policy
Once you’ve realized the need for life insurance, it’s important to choose the type of policy that’s right for you. There are many types to choose from and they range from plain vanilla term insurance to variable adjustable rate policies with several bells and whistles.
Before choosing the type of policy you need, you should first determine how much coverage is necessary. There are several “rules-of-thumb” floating around (like your age times 20). However, the most important determinant depends on your income, your dependents, your debts, and your current lifestyle.
The fact is that there really is no one right answer regarding the exact amount of life insurance coverage you need. It really comes down to what you want your life insurance to do for you. For example, if you just want it for final expenses, then an $8,000 – $10,000 term policy should suffice. But if you need a policy that will cover final expenses, pay your mortgage, and provide support for your family for an extended period of time, then you will obviously need a much higher amount of coverage.
There are several online life insurance calculators that can help you determine a more exact dollar amount. Most will ask you to enter data on various expenses, ongoing household and living expenses, whether or not you have a spouse that earns an income, and an anticipated amount of time. The calculator will then give you a suggested amount of coverage.
What Type of Life Insurance Policy Do I Need?
There has long been a debate as to whether term or whole life is the better type of life insurance. And the answer has always been…it depends.
If you are short on what you can spend for premiums and you are currently young and in good health, then term life insurance will allow you to get a larger amount of death benefit coverage for a very reasonable amount of premium. Keep in mind, though, that over time, the premiums for term life insurance will go up, and you may not be able to re-qualify to renew your policy should you become ill in the future.
On the other hand, if you want to lock in your premium rate for life, then a permanent or whole life insurance policy (link) may be the better choice. Although the premiums are higher in the beginning as compared to term life insurance, a whole life policy will allow you to pay the same premium over the years, and you will not have to re-qualify for your policy every few years as you do with term insurance.
The bottom line is that regardless of which type of policy you buy, life insurance protection is necessary for anyone with loved ones they wish to protect. Remember, life insurance isn’t so much for those who die, but for those who live.