In the US, about 66 percent of adults are covered by life insurance. However, 1 in 5 say they do not have enough life insurance. And, 44 percent of millennials say they overestimated the cost of life insurance.
Clearly, a lot of us could be doing a better job of choosing and understanding life insurance.
If you’re buying life insurance for the first time, you’re probably wondering what plan you should choose. Check out this guide to learn how to choose the right life insurance plans for your needs.
What’s the Point of Life Insurance?
First things first, what exactly is the point of buying life insurance?
If you have a loved one who depends on you, life insurance is absolutely crucial. This is because life insurance provides your loved one with income replacement in the event that you pass away early.
Without life insurance, your loved ones may be left on their own when it comes to making up for your lost income. For this reason, choosing the right life insurance policy is very important.
Figure Out How Much Coverage You Need
When purchasing life insurance, there is no exact rule about how much you’ll need. The amount of life insurance you need will depend on your:
- How many dependents you have
- Liabilities (such as your mortgage, credit card, car loans, etc)
- Education expenses for your children
However, the general rule of thumb is to find a plan that would cover 5 to 10 times your annual salary in the event of your death. And, if you have the desire to leave a financial legacy, you’ll also want to add this amount to your life insurance plan.
Beyond these basic guidelines, you’ll want to consult a financial planner to figure out the exact amount of coverage you’ll need.
Remember That Needs Change Over Time
When choosing your coverage, it’s also important to keep in mind that your needs will change over time.
For example, as you pay down your debts, your coverage will likely decrease. But, as your family grows larger, your coverage will likely increase.
Every few years, you should take a look at your life insurance policy to see if it needs any changes. It’s also important to review it when you have a big life change, such as s new baby, a divorce, a marriage, etc.
Term vs Perm
There are two different types of life insurance: term life insurance or permanent life insurance.
Which one you choose will depend on your goals, how much money you intend to spend, and how long you’ll need the life insurance for.
Here’s what to know about each type of life insurance:
Term Life Insurance
Term life insurance covers a specific time frame. Usually, this time frame is for 20 years or less.
This is the most affordable type of life insurance, which makes it a great choice if you’re trying to pay off a mortgage or if you have kids in the home. When the initial term is up, you could choose to continue the policy, however, the premiums could rise significantly.
Permanent Life Insurance
Permanent life insurance covers you for your entire lifetime and can be used to reach a number of goals.
If you have a need for long-term insurance, this may be the better choice for you. Also, if you’d like to pass along your money to heirs or to a favorite charity, this type of life insurance is likely the better fit.
It’s also important to note that permanent life insurance plans sometimes allow you to use the death benefit, which is great if someone in your family will one day need long-term care.
In both permanent and term life insurance, the death benefits pass along to the beneficiary without any federal income tax.
With term life insurance, premiums are usually more affordable, but they can increase with age. While perm life insurance premiums are more expensive, they don’t increase with age.
Term life insurance also doesn’t offer any cash value, whereas the cash value of permanent life insurance can grow over time, tax-deferred.
How Much Will Life Insurance Cost Me?
On average, a term life insurance policy will cost you a little more than your monthly Netflix subscription.
You’ll usually pay around $200 per year, and even less if you’re in your 20s. So, you can pretty much forget about the excuse that life insurance is too expensive for you!
As you get older, you’ll typically pay more for your policy.
Also, keep in mind that lifestyle factors can affect how much you pay for your policy. For example, if you smoke, you’ll pay a lot more for your policy.
However, if you’re healthy, you can expect to pay between $20 to $30 per month for your life insurance. In your 40s, you’ll probably pay between $40 to $50 if you’re healthy.
How Long of a Term Should I Choose?
For most people, a 20 to 30-year policy makes the most sense. This way, if you have young kids, you’ll be able to ensure that they’re properly covered during the years that you would be home raising them.
However, you also want to keep in mind how much you can afford. Typically, policy lengths that are between 20 and 30 years are the sweet spot for getting the most coverage with the lowest premiums.
Shopping for Life Insurance
There are three options for buying life insurance:
- Buying online via an independent broker
- Buying directly from an insurance company
- Buying through an independent local agent
In general, buying through an independent broker is the best option, as this is how you’ll get the best price.
Another option to consider is buying life insurance through your workplace.
Understanding Life Insurance: Wrap Up
Now that you have this guide to understanding life insurance, it’s time to get out there and pick a policy.
Remember, before you choose, consult with your loved ones so you can decide on a policy that’s best for everyone.
Also, be sure to check back in with our blog for more lifestyle tips and tricks.