Buying affordable life insurance makes financial sense. Often, you're protecting assets, paying expensive estate taxes or accumulating cash value for future needs (if it is a permanent policy). But before you purchase coverage, it's critical to understand why and what you are buying, and how to find the best policies. Asking these five questions before the process may help.
1. What Is The Purpose Of Buying A Life Insurance Policy? Creating an immediate estate, providing for lost income that can't be replaced and paying for education, living and funeral expenses are perhaps the most common answers. And they are good answers. "Do you love your spouse and children"?
Yes...some folks even use this logic. It's not flawed, but it's based on the heart, as opposed to empirical data that may make a bit more financial sense. We try to use a combination of both, but accuracy never takes a back seat.
In layman's terminology, isn't the reason a policy is purchased because an existing lifestyle needs to be maintained when a significant breadwinner dies? It's a simple approach, but also extremely accurate.
2. How Much Coverage Do I Need? This may be the most important question. While it's critical that you have enough benefits through a combination of work and policies you own, it's also important to avoid paying for coverage you simply don't need or will cancel.
There are many different theories and calculations. Perhaps one of the simplest solutions is the 7-10 concept. Your ideal face amount is based on seven to ten times your annual income. Thus, if your income is $50,000 per year, approximately $350,000-$500,000 of coverage would be recommended.
Another basic calculation is making the assumption that you can safely earn a specified long-term rate of return. For example, if you needed $40,000 of yearly income and assumed a 5% rate of return, $800,000 of coverage would be needed. If 8% was used instead (we would not recommend that), the needed face amount of insurance would reduce to $500,000.
One of the biggest variables that must be considered is your budget. No matter what method you use to determine your needs, the effective management of your budget is critical. That is...If your budget allows you to spend $125 per month on protection, paying $225 per month, because it matches your needs, is not a good idea. You'll likely lapse the policies you purchase and will have to start all over.
So...what is the best way to determine how much life insurance protection you need? (It took a while, but finally...here's the answer) Since every situation is unique, consulting an experienced broker (it does not have to be face-to-face) will be very helpful. The other two listed methods are a good start, if you just want a basic understanding.
3. How Much Can I Afford To Spend? If your budget is $100 per month and the perfect solution to your needs will cost you $240 per month, you're going to have to do one of two things. Firstly, spend more than your budget allows. That's not a good idea since it could have a magnified negative impact on many other financial obligations and needs you have.
Secondly, you could adjust the face amount of coverage you need to lower the premium. Although this will result in not fully covering the need, it will still be beneficial. However, if the original recommendation was based on a combination of temporary and permanent plans, a simple solution would be to alter the mix to reflect more term and less whole-life or universal life coverage. The new mix will be a short-term fix and will provide a combination of policies that meets (or gets very close) your budget.
4. How Long Do I Need Life Insurance Coverage? Obviously, your age will play a major determining factor when answering that question. If you're 30 years old, have a child, and are planning on increasing your family, your need will be different than someone who is 50 years old with two children in college. Although the need is present in both scenarios, the anticipated duration and amount of coverage will be different.
Another important variable is that the amount of needed benefit will significantly change, depending on the age and financial status of your dependents. For example, if your youngest child is only age four, it's a safe assumption that your household will need to account for the loss of your earnings for at least another 15-20 years. 20-Year term quotes are always the cheapest. Of course, if your youngest child is a high school senior, your timeline suddenly changes to about 5-10 years.
5. How Are You Going To Buy A Policy? Do you want to do most of the research yourself, investigate companies and their ratings, get online quotes and apply for coverage through a reputable website? Or do you prefer the face-to-face contact, where you can consider some direct feedback and recommendations and ask questions as you go? We can research and check the A.M. Best and Standard & Poors ratings for you.
Perhaps the best answer is simply a combination of personal unbiased experience and modern technology. We believe our website accomplishes both. Between more than 30 years of experience along with the most modern software that's able to find the best solutions, consumers have a powerful solution. Our quotes are free and will save you time and money.