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If you’ve reached that stage in life when purchasing life insurance makes sense—and some financial advisors would argue that’s pretty much as soon as you become an adult and start earning money—you may be overwhelmed, or at least confused, by the sheer number of choices you have. But don’t let that deter you from investigating your options and investing in a life insurance policy. The best life insurance strategy for you is out there. You just have to do a little digging. And today, we’re going to grab a shovel and help you.
Who Needs Life Insurance?
Here’s the short answer. Anyone who has financial dependents who would suffer as a result of his or her death should carry life insurance. If you’re a parent, life insurance is imperative. The same is true if you have adult dependents, including elderly parents or a disabled adult child. But even if you don’t have dependents, carrying life insurance may be an important step toward building financial security.
What Kind of Life Insurance Do I Need?
It depends on the goals you’ve set for yourself. There are two general categories of life insurance, one of which may be better suited to your needs than the other.
Your first option is permanent life insurance, also known as whole life. Whole life is almost invariably recommended by financial planners as one low-risk means of building wealth. Since whole life policies accrue some cash value each time you pay your premium, they represent an easy way to make saving money a part of your financial routine.
Depending on the policy you choose, the cash value of your whole life policy may earn interest or dividends. Some whole life insurance policies also offer an investment option and offer the chance to grow your cash reserves more quickly. That’s why financial experts recommend you start purchasing whole life insurance as soon as you can. The sooner you purchase whole life insurance, the faster you’ll be able to meet your savings and earning goals.
The money that accrues in a whole life policy can be used by the living at any time. But at the same time, whole life provides a safety net for your loved ones in the form of a death benefit. Whole life policies pay a death benefit as soon as you purchase them. Even if you haven’t accrued any significant cash value in your policy, death benefits are available immediately upon paying your first premium.
Your second life insurance option is term insurance. Unlike whole life, term life insurance only provides one benefit: a death benefit. It isn’t intended as a savings or investment vehicle. It simply offers financial protection for the people you name as beneficiaries. Term life insurance only has value as long as you pay your premiums. You purchase it for a certain period, or term, as its name implies. If you’re alive when the term ends, the value of your policy is zero. But term life serves an important function and is less expensive than whole life. It’s particularly affordable when you are young and healthy.
When A Third Option Makes Sense
Supplemental life insurance is a policy you purchase in addition to your primary policy. It can take the form of either whole life or term life insurance but term is more common. Many employers offer life insurance as an employee benefit. But typically employers only offer one kind and the coverage limits may not provide adequate protection for your loved ones. When offered as a free benefit, policy limits often equal just one year of an employee’s salary. That’s not going to go very far towards taking care of your loved ones, particularly if you have children to put through college. That’s when supplemental life insurance may be a solution.
Some companies offer employees the option of purchasing supplemental insurance in addition to the free or subsidized insurance they provide. The coverage limits of supplemental life insurance policies tend to be higher than what primary plans offer. Employer-based supplemental life insurance comes with the convenience of paying premiums automatically through paycheck deductions. If you’re like many people, you’d just as soon have one less bill to worry about
Many people, however, find it makes sense to purchase it independently. Depending on your age, purchasing supplemental insurance on your own can be less costly. Employer-sponsored supplemental insurance policies are typically group policies and, as such, premiums reflect the risk associated with a group that may include people older than you or the chronically ill. If you’re young and healthy, you may not want to pay the higher premiums associated with group policies. An individual policy purchased on the open market can be more cost-effective: often, you can get better coverage for a lower price with an individual policy. In addition, unlike employer-sponsored coverage, a policy you buy on your own is portable. It doesn’t go away if you change jobs.
How to Choose a Supplemental Life Insurance Policy
The main question you need to ask yourself before buying supplemental life insurance is how much money your loved ones will need to live comfortably when you’re no longer here to take care of them. Working spouses may need less than non-working spouses. If you have children, the question becomes more complicated. Very young children will be dependent on others for financial support for a long time. You should take that into account when choosing your coverage limits.
When figuring out how much insurance you need, it’s important to consider your current and future expenses. Take a look at your monthly budget. Let’s say it costs you $5000 to pay your mortgage and other bills and your spouse contributes half of that each month, leaving a shortfall of $2500 per month. You have one child in middle school and you expect they will need support for at least another ten years. That means your family will need about $300,000 in total coverage to take care of ten years’ worth of expenses: $2500 times twelve months ($30,000) times ten years ($300,00). If your primary policy offers a $100,000 benefit, that leaves a gap of $200,000. So the supplemental policy you choose should carry a death benefit somewhere in the neighborhood of $200,000. However, at some point, your child may go to college. If you want your spouse to be able to pay for your child’s higher education, which can easily cost $100,000, you may want to increase the limits of your policy accordingly.
How Much Does Supplemental Life Insurance Cost?
The answer is, it depends. If you are young and healthy, your premiums will be lower than they’d be if you were older and had some health problems. Term life policies come in different term lengths, usually between ten and thirty years. When you’re young, it may make sense to take out a longer policy because you can lock in a low rate when you’re considered a low-risk policy owner. Incidentally, if you’re a smoker, you can expect to pay considerably more for a policy under all circumstances.
Before purchasing a policy, compare your options. Talk to your company’s benefits or HR manager to find out if you can get coverage through your job. Ask your friends if they can recommend an insurance agent who’d be willing to spend some time discussing your options with you. As is the case with most products, comparison shopping is a smart idea. Buying life insurance is an important decision so do your due diligence. That’s how you can enjoy the peace of mind of knowing your family will be protected should the worst come to pass.