Editor’s Note: Gary Dek is a former investment banker and private equity analyst turned personal finance blogger. He writes for MyLifeInsuranceQuotes123.com, offering unbiased life insurance guides and expert advice for consumers looking for the best, affordable policy.
Having a good life insurance plan in place is a wise move toward financial security. However, there are still many uninsured people out there, due in part to the many preconceived notions that shopping for life insurance is a difficult, stressful and expensive task. According to LIMRA, a global research firm, “86% say they haven’t bought life insurance because it’s too expensive, yet overestimate its true cost by more than 2x.”
Many U.S. consumers do not even know where to begin, and there are numerous sources out there who will insist that you need an insurance agent, broker, or financial advisor to find the best rates. This is not to say those resources do not add value, but before you speak to anyone, educate yourself on life insurance. The research and comparison process does not need to be time-consuming and tedious, and you can find great information from reputable sources online such as LifeHappens.org.
The Coverage You Need From A Life Insurance Policy
The first step to selecting a quality life insurance policy is to know what type of coverage is needed, and that depends on how much protection you need in the first place. This is because a $1,000,000 whole life policy may cost you $15,000 a year, while the same amount of coverage in the form of 30-year term life will cost you about $1,500 annually. As a general rule, if you are not a high net worth individual, term life insurance is a better choice.
To determine how much life insurance you need, it is important to understand your family’s financial situation. Some insurance experts tout a multiple of your annual income, suggesting that the multiple you choose represents the number of years worth of income you want to leave your beneficiaries. Unfortunately, this method is very flawed.
For example, a family of four with 2 young children has a household income of $100,000. The family is paying a mortgage, 2 car loans, making 401K and IRA contributions, and saving for their kids’ college fund. To recommend this family buy the same amount of life insurance as a couple with no intention of having kids, renting an apartment, and owning 1 car is absurd.
To facilitate the process, check out this amazing online calculator. You will need estimates of your family’s current and future income, living expenses, assets, liabilities, retirement accounts, uncovered medical bills, final expenses, etc. By researching the factors that affect the amount of coverage you need, consumers can choose the right death benefit for their policy and avoid under or over-insuring themselves.
Types of Life Insurance Coverage
After deciding what amount of protection will be necessary, you need to review and familiarize yourself with the different types of life insurance policies available. The most common and affordable kind is term life insurance, where coverage is temporary and consumers pick a predetermined period of time to be covered.
The other popular form of coverage is whole life insurance, a permanent policy that never expires and requires lifelong payments. Term life insurance is a basic form of coverage with more affordable rates, but whole life insurance is much more comprehensive, offers an investment feature, and guarantees a payout. It is crucial that you carefully compare term and whole life insurance before deciding. After all, your insurance is a long-term financial commitment.
Term Life Insurance
Term life insurance is a type of plan in which coverage is purchased for a predetermined amount of time. The duration can vary from policy to policy, but coverage comes in 5, 10, 15, 20 and 30 year periods. A 5 year period is a popular choice as a supplementary policy, also called temporary life insurance.
For example, the holder of a permanent whole life insurance policy may suddenly incur a lot of debt, typically in the form of a personal or business loan, and purchase a 5 year policy in order to ensure extra protection for beneficiaries while paying off the debt. Long-term 20 and 30 year term life policies are more suitable for people with young children, as a few decades is plenty of time for them to mature, get an education, and reach financial independence.
Term life offers a fixed premium, fixed death benefit, and no cash value or investment portion. It is pure insurance and thus very affordable for most young families.
Whole Life Insurance
Whole life insurance has gained more attention after the financial crisis, mainly from affluent individuals looking for low-risk, stable returns. Where term is simple, whole is complex. Whole life insurance is permanent – there is no need to renew once a policy has been issued. Lifetime premiums are also fixed, but expensive. Whole life comes with a cash value, which acts like a savings account that guarantees returns between 3 and 5%.
Choosing A Policy
After picking the right amount and kind of life insurance for you and your family’s future needs, you must compare free life insurance quotes online from multiple companies. Like any other product or service that you comparison shop for, you will find the best value by researching what is available on the market. However, remember that these are quotes and actual rates may vary after you complete a questionnaire and medical exam. If you find a few carriers within your budget, request a free application to review and call a company representative to answer any questions you may have.
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Buying life insurance isn’t difficult, but it is a long-term commitment. If millions of other Americans who need coverage can figure it out, so can you with a little time and effort.