A Simple Guide to Purchasing Life Insurance

Life Insurance Buying GuideLife insurance can be a touchy subject to talk about.  And for a twenty-something just starting out, decisions like that often seem pretty far down the road.

But providing a financial safety net for the people that matter most in your life is too important to put off over and over.

In our last blog, we looked at three types of insurance policies that generally fall into the “must-have” category: auto, homeowner’s / renter’s, and health insurance.

In this blog, we’ll be diving into life insurance – a coverage type that’s a little less “mandated” as those must-haves, but one that can be just as important.

So how much coverage do you need?  What kind of policy fits your circumstances best?  Do you even need any life insurance coverage at all?  Read on for simple answers to those questions and more.

Do You Need Life Insurance?
Life insurance often falls into the non-negotiable category alongside coverage to protect your car, your home, and your health.

But if you’re twenty, single, and still in college?  Life insurance of any kind probably isn’t for you.

Sure, there’s the advantage of locking-in a rate while you’re young and healthy – most people don’t buy coverage until later in life, after all, so it does cost less.

But it’s a myth that insurance coverage is “easier” to qualify for when you’re young.  You’ll have to go through the same tests and be subject to an actuarial table no matter when you buy.  Plus you’ll be paying for coverage you don’t need in the meantime.  And that’s money that could be used of other important stuff, like an emergency savings fund, investment in an individual retirement account, or just handling day-to-day expenses.

On the other hand, coverage does make sense a lot of when you have dependents.  In fact, if you have a spouse or children that rely on your financial contribution each month, it’s pretty much indispensible.  It’s also a very good idea to cover yourself if you’re single but have considerable debt that wouldn’t be covered by your equity, savings, and retirement accounts.

If either of those scenarios describes you, then it’s probably time to start thinking about your options.  And while there’s no magic bullet formula to buying insurance, taking the time to understand your insurance needs and the kinds of policies available can help ensure you get the coverage that you and your family need without paying an arm and a leg in the process.

To give you a good head-start, consider the following money-saving tips.

Look for a Term Policy
Insurance agents make more money off whole life plans, so that’s often where they start the sales process.  But whole life plans often make less sense than a level term policy – especially for someone just starting out.

Term insurance does just what it implies: protects your family with a specific amount of coverage for a set number of years.  At the end of the term, the policy disappears.

The upside?  A 20 or 30 year term plan provides you with coverage for when you need it – say until a child turns 18 or up to your retirement – at a far reduced rate than whole life.

Do Your Homework Before Buying a “Cash Value” Plan
Insurers generally sell the investment portion of cash value coverage – like universal or certain whole life plans – as a way to ensure you receive a payout for years of premiums.

But the savings portion of the plan is actually independent from the life insurance policy.  That means it’s a term life policy with an additional savings plan added on for good measure.  The only difference is it costs more – with the difference in premiums being applied to the savings side.

Two other caveats: the investment portion of the plan often involves hefty up-front fees and they’re met to be held for life.  If you buy one of these policies and can’t afford to make a premium, you’re leaving a lot of surplus cash on the table.

That’s not to say that a cash value plan is never a good idea.  But given the drawbacks, buying a term policy and investing the difference in a low-cost, high-performing IRA or mutual fund is often a smarter alternative.

Make Sure You Have Enough
It’s not worth saving a dollar or two a month on a policy if it means putting your family in a financial bind.  So while it’s a good idea to carefully review your insurance options and shop around for the best coverage, make sure you have a policy that provides the right amount of financial backing.

So how much is enough?  Well, there are several good life insurance calculators available on the web that I encourage you to experiment with.

But you can also get a good ballpark figure in a few minutes with a spreadsheet program by combining your outstanding debt with your monthly expenses (you have been budgeting, right?), take home pay, and future savings goals – like sending a child to college or living comfortably in retirement.

Then take that figure and subtract any savings or retirement funds that can be used to supplement the coverage you buy.  So if you have an emergency fund of $10,000 and retirement savings of $75,000, that would knock $85,000 off of the amount of coverage you’d want to buy.

That’s not a hard-and-fast formula, however.  Every person and family is different.  And, when you need coverage, life insurance is too important not to get right.  So spend some time working with calculators then get in touch with an insurance company and agent you can trust to work out the finer policy details.

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