Death and taxes are the two certain things in life.
You file your taxes every year and ensure the taxman is getting what belongs to him, but what are you doing about death?
Preparing for death is a smart thing to do, especially when you have people who depend on you. Do you ever think about what will happen to your children, siblings, or even parents if you were to die today? Who will take care of their financial needs?
If you can’t answer that question, it’s clear you need to purchase a life insurance plan. If you’ve already taken steps to purchase this type of insurance, you might be feeling overwhelmed about the choices at your disposal.
So, how do you choose the right plan for you? Continue reading to learn how to purchase life insurance.
But first off:
What Is Life Insurance?
Life insurance works like most of the insurance policies you know, except that you’re not the one to benefit. You pay premiums to your insurer as agreed, but if you pass on while the policy is active, your beneficiaries will receive your death benefits.
Like most insurance plans, a life insurance policy will become void if you default on the payments.
Now, there are different types of life insurance. Here’s a brief overview.
Term Life Insurance
Broadly speaking, there are two main types of life insurance: term life insurance and whole life insurance.
Term life insurance provides coverage for a certain period of time, after which it expires. For example, a 15-year term life insurance policy will cover the policyholder for 15 years. If they die within 15 years, the beneficiaries will receive death benefits.
If the policyholder outlives the insurance policy, it expires. Some insurance companies, however, allow the option to renew the policy or convert it to whole life insurance.
Whole Life Insurance
Unlike term life insurance, whole life insurance provides coverage throughout the policyholder’s life. As long as the policyholders keep up with premium payments, the policy will remain in force until they pass on.
There are different types of whole life insurance, commonly: universal life insurance, variable life insurance, indexed universal life insurance, and variable universal life insurance.
There are slight variations among these types of whole life insurance, and you’ll find that some insurers don’t offer them all.
Another major difference between term life insurance and whole life insurance is the latter has a cash value feature. This is like a savings account where a portion of the premiums you pay go into. The cash value will grow over time since the insurance company will invest the funds on your behalf.
You can also increase the value of a whole life insurance plan by adding a paid-up additions (PUA) rider. Here’s paid up additions explained if you’re struggling to get a hang of it.
Now that you have basic knowledge about life insurance, how do you choose a plan that’s right for you?
Length of Coverage
How long do you need life insurance coverage?
To answer this question, just look at your life. What’s your age? What’s the age of your would-be beneficiaries?
Term life is ideal when you need coverage for a specific period of time. Your expectation is that by the time the policy expires, your beneficiaries will be financially independent.
For example, let’s say you’re a 30-year-old parent with a 10-year-old son. If you purchase a 20-year term life policy, by the time it expires your child will be 30 years, at which they’re likely to be financially independent.
If you have a beneficiary who will be a lifelong dependent, such as a chronically ill child, whole life insurance is the best policy to purchase. Because there’s no likelihood that the dependent will ever get out of your nest, whole life insurance will ensure they get your death benefits any time you pass on.
Life insurance costs money, so you must be able to afford it. But from the fact that you’re currently in the market for a life plan, the assumption is you can afford some form of life insurance.
Here’s the thing.
Term life insurance is typically cheaper than whole life insurance. Although there are factors, such as your age and health status, that will play a big role in the determination of your insurance premiums, if you don’t have much wiggle-room in your finances, you’ll find term life insurance more affordable.
Amount of Coverage You Need
You want to leave your beneficiaries enough money for their expenses, including upkeep, education, and housing. If you’re your family’s breadwinner and you have a mortgage, you also want to make sure your death benefits will be enough to settle the mortgage.
Depending on the amount of coverage, you’ll know the right life insurance plan for you. Term life plans have lower coverage amounts compared to whole life plans. So, if you need a lot of coverage, it’s likely that whole life insurance is the right plan for you.
A Life Insurance Plan Is a Must Have
You’ve made a smart decision to purchase a life insurance plan. However, it’s not just about buying life insurance. You need to purchase the right life insurance plan for your needs.
We’ve explained the different types of life insurance, as well as what you should consider when buying a plan. Put this advice to use.
Explore our blog for more helpful life tips and advice.