According to MSN Money, over 30% of households have no life insurance and 70% of families say if their spouse dies, they will have trouble paying their monthly bills. Financial planners recommend the income producing spouse carry enough insurance to cover all debt plus a minimum of 2 years of annual income. A number of other factors should also be considered when deciding on how much life insurance should be purchased. Need Life Insurance, but not sure how much? Try our new free Life Insurance calculator! Click here!
Why should I buy life insurance?
Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:
- Replace income for your family & dependents
If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
- Pay final expenses
Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
- Create an inheritance for your heirs
Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
- Pay federal “death” taxes and state “death” taxes
Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.
- Make significant charitable contributions
By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.
- Create a source of savings
Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).
How should I choose what type of life insurance to buy?
You should consider term life insurance if:
- You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, you want the insurance to pay off your 30 year mortgage, purchase a 30 year life policy for the amount of your mortgage (aka Mortgage Life).
- You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build a cash value.
If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.
Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.
You should consider permanent whole life insurance if:
- You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.
- You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due to the company before determining what’s goes to your beneficiary.
Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.
You should consider ROP (Return of Premium) if:
- You have a need for large amounts of life insurance, but would like a permanent option at the end of the term.
- You want all your money back at the end of the term.
There are a number of other different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life.