Finding the right life insurance is a critical part of personal financial planning, but buying it can be complicated. There are a host of factors that contribute to your decision, including age, marital status and whether or not you have children. It’s also necessary to calculate the amount of coverage you need to ensure your family can manage comfortably and responsibly if you aren’t there. Here are some tips for buying life insurance to help you make sense of all the choices you’ll face.
Tip #1: Determine how much life insurance coverage you need.
The goal in calculating the amount of coverage you need is to make sure your heirs receive enough for them to pay the bills and maintain their standard of living. One rule of thumb, some financial planners often use is to have enough coverage to replace five to seven years of your salary. If you have very young children or significant debt, you should probably aim to replace ten years of salary.
Another approach is to make a list of all current and ongoing expenses, like the mortgage payment, utilities, student loans, credit card debt, healthcare costs and childcare. Then estimate future expenses, like your children’s’ college tuition or spouse’s retirement. Having a comprehensive list of all current and potential future expenses will help you gauge how much your family will need after you’re gone. Along with a list of expenses, you should itemize assets you own that could provide cash or income.
Tip #2: Find the right type of policy.
Once you know the amount of coverage you need, you’ll have to decide which type of policy is right for your situation. There are two basic types. Term life insurance generally offers the highest death benefit for the lowest cost. It covers a specific period of time, usually 10, 15, 20 or 30 years. Policyholders pay an annual or monthly fixed premium that’s renewable each year. If you’re young, premiums for this kind of life insurance are fairly low but as you get older, premiums increase.
The other type of life insurance policy is permanent life insurance, generally known as Whole Life or Universal Life. These policies last until you die as long as the premiums are paid. Part of that premium goes towards cash value, allowing you to accumulate tax-deferred savings. Universal Life insurance is more of a hybrid. Although it is permanent insurance, it is a combination of term insurance cash value accumulation along with flexible premiums and riders. Most permanent life insurance policies don’t have significant cash value in the early years but can perform very well over time if funded properly.
Tip #3: Hang Onto Your Paperwork.
Although it might seem that once the paperwork is signed you’re done—you aren’t. Make sure your heirs know your life insurance policy exists and where it will be kept. Insurance companies aren’t required to find out if policyholders are still alive, so it’s up to beneficiaries to come forward and make sure they are paid. The U.S. government recommends scanning and storing documents electronically—or making photocopies to keep at home—and then saving the hard copies someplace safe, with your attorney, in a safe deposit box or at home in a fireproof safe.
HealthMarkets’ licensed agents can help you by not only offering tips for buying life insurance but also finding the right coverage and best plan for you and your family. Call us 24/7 at (800) 917-4169 or meet with one of our 3,000 local, licensed insurance agents.