What is life insurance?
A life insurance policy seems like another useless financial burden, ready to take vacation money away from the monthly budget. This type of risk management has some negative publicity attached to it, and people avoid it since they associate it with the death of a loved one or themselves. However, that is not true, since current policies can bring significant benefits even during a lifetime. Some holders even use life insurance as a saving product or a safety net.
Currently, you get to choose between term life insurance (1-30 years) and permanent or whole life insurance. The term option is usually associated with a mortgage or could be included in the benefits package of your employer. Unfortunately, it is only available as long as you are in that job. In contrast, permanent life insurance will stay with you as long as you live and you can use the funds for investments or supplement your pension after you retire and have contributed enough.
Am I too young or too old for life insurance?
While the minimum age of getting your life insurance is usually 18 (or 21 in some states), and most companies usually consider applicants up to 65, there are options even for 85 or even 90 years old clients. In fact, each stage of your life offers a different motivation for life insurance.
Th only difference your age makes is in the motivations behind getting a policy. Age also affects the particular product that best fits your needs. You should start with the cheapest plan, a term life insurance, which you can convert to a permanent life insurance. You should consider switching when your income allows this financial move and when it makes sense to leverage the new tool as a long-term investment. You can use a permanent life insurance as a tax-free death benefit paid to survivors, establish a charitable foundation or for your benefit, by liquidating the fund and cashing the money after retirement.
What are the benefits of life insurance?
Home expenses coverage
A life insurance offers you peace of mind regarding the financial burden you could leave behind you. If you have a mortgage, most likely your lender will force you to get some form of life insurance as a way of covering their risks. Turn this obligation into an opportunity and evaluate your best choice.
Start with your health state and lifestyle. If you are a heavy smoker, substance consumer, obese or suffering from diabetes, just take the bank’s choice and sign an insurance without seeing the doctor. However, if you are young and fit, consider a term insurance since it tends to be less expensive. The cuts rise to half the amount, and you get to choose your beneficiary, your lender does not automatically cash it.
Income loss
If you are the primary bread earner in your household, your death could mean a substantial financial loss, added to the emotional one. Protecting your loved ones usually comes in the form of a term life insurance. The best decision is to get one as soon as possible since it is cheaper for young, healthy individuals. Furthermore, the rate is locked for the entire duration of the contract. To evaluate your mandatory coverage just think about the time you have left until normal retirement and the expected annual salary. Be conservative, but realistic in your estimations. Reflect on the needs of your family to maintain the same lifestyle, pay the mortgage, save for education and keep a small reserve for out of pocket healthcare expenses.
College tuition support
A life insurance is a tool to make sure there are enough college money for your offspring if a tragedy occurs. Don’t buy into the broker’s pitch about the value of the policy as a swiss-knife of college aid. A policy is just the last resort in the misfortunate event of your death, it is a help for your spouse and the family, no more than if life would go on as usual. If you are looking for a dedicated product, do your research about a 529 plan, a dedicated, qualified tuition plan.
Business protection
The death of a business partner can result in the dissolution of the company if the other partners don’t have enough money to buy the defunct’s shares and go on with the strategy. Each partner should have a life insurance with the other partners as beneficiaries, covering his part of the shares. The solution is to get a buy/sell agreement between owners, which can include the deceased’s family as a secondary beneficiary.
Some businesses even have life key employee insurance. The role of the policy is to cover short-term losses until the company hires a suitable replacement. Some insurers even allow changing the key person without adjusting the insurance.
Paying for burial expenses
Finally, the raison d’etre of the life insurance is to help your loved ones manage financial burdens that appear after a sudden pass away. Burial expenses, which rise to $ 10.000 can destabilize a family’s budget and trigger late mortgage payments. Therefore, an unprotected family can expect a whirlwind of negative financial consequences. There are individual burial insurances if you only want this service. However, considering that all life insurance policies include this claim and the costs are similar, you are better off with the life insurance.
3 Questions to ask before signing the policy
Life insurances are useful risk management tools, but they have their flaws. Before choosing such a package, you should perform a proper analysis of your needs and the existing offer. Aim for convergence between the two. Never give in to the pressure of an insurance broker, even if you know them personally. The most important questions to ask before signing the policy are:
- What is the early cash-out penalty?
- What if it doesn’t perform as expected? What is the minimal guaranteed amount?
- What is the penalty for changing the beneficiary?
If any of the answers to these questions is not reasonable for you, just find another company. Don’t settle until you find a comfortable offer on the long run.
Conclusions
Life insurances are tools that, wisely chosen, can benefit the holder and their family or business partners. The most important aspect is to make a decision taking into consideration your age, health status, and income need. Evaluate together with your family the financial impact of your premature death.
Simply put, everybody who has any debt or dependents or does not want to be a burden to the family should have life insurance. Remember, both assets and liabilities are passed on to survivors.