With more than 60% of Americans heading into their golden years without a will, many more overlook the value of life insurance. Figuring out how to choose life insurance is one of the most daunting life choices and can keep people from ever signing up. However, it's important to your family and their future that you take that choice seriously.
Here are five tips for choosing life insurance that can take care of your loved ones.
1. Understand Your Reasons For It
If you don't fully understand the reasons for life insurance, you need to build a robust understanding of what it's for.
Life insurance types will vary based on what your financial goals are and what position you're in but the purpose is the same. When you have family or a partner who will struggle to pay for their day to day needs when you're gone, you can help them get by with life insurance.
If you aren't the sole breadwinner, you might not need to get life insurance. However, it's never a bad idea to help contribute to your family following a death.
Either way, your salary surely contributes something to your family by helping to cover the mortgage or any regular bills. If you have kids that you're planning on sending to college, you can ensure that they can continue their education even in the unfortunate case of your death.
Every family will have a different financial situation and could require different amounts of support. Life insurance is never a bad idea, so long as it doesn't interfere with your current financial situation or your more pressing financial goals.
2. Calculate The Coverage That You Need
There's no hard and fast rule for calculating how much life insurance you should have for you and your family. The variety of factors that influence the amount include how much money you currently make, the sources of income that you have, and how many kids you have.
Your current quality of life and comfort level that your finances provide needs to come into play as well. Changing your family's expectations of how they can live their life is hard. While you might expect them to adjust, if they can't keep up with the payments on your current home, a death could totally uproot them.
If you have a lifestyle that's accrued a lot of debt in recent years, you need to assume that collectors will hassle your family. If your life insurance can't wipe that out, you'll be leaving your family in a tough situation.
Follow a general guideline of leaving 5-10 times how much you make annually behind for your family. Talk to a financial planning professional to get down to the nitty-gritty and calculate a real number. Skimping on your life insurance isn't an option if you've got a large family to worry about.
3. Learn About Term Life Insurance
If you know that you need to get life insurance for a set period of time, buying term rather than permanent life insurance is the way to go. Term life insurance will match the length of the terms based on the length that you assume you'll need to have the policy.
If you still have younger kids running around the house, you want to ensure that you can provide for their future and their college degrees. This is a good reason to pick up a 20-year term policy. When 20 years are up, your policy ends with a potential option to renew it.
If you have a debt that has been hanging over your head, like your own student debt, you can ensure that it gets paid off with your term insurance. If you project it'll take 15 years to pay it off, getting a 15-year policy ensures that in the event of your death, your family has the money to pay it off.
4. Don't Let Your Budget Get in the Way
Having a limited budget is no reason to shy away from a life insurance policy. A term policy can ensure that, even if you don't have a lot of money to spend, you can provide your family with a lot of life insurance. Since you might not die during that short period, you won't be paying as much for your life insurance.
A permanent policy will cost you much more.
However, you'll be missing out on the equity that a life insurance policy can build. Permanent insurance will create cash savings that will become a form of equity that your family can use later.
Once that term ends, you can renew or buy a new policy, but you'll be starting from scratch in terms of equity.
5. Consider Permanent Insurance
If you need insurance to persist through the entire length of your life, a permanent policy is a way to go. Whether you are struck by an unfortunate accident or make it well past 100 years, you'll be able to build tax-deferred savings.
You can even pay premiums on your life insurance with the equity that you accrue. If you get into debt, you can borrow from it and if that loan isn't repaid before your death, it merely gets deducted before your beneficiary collects.
Permanent insurance does much of the work for you since you pay a slightly higher premium than for shorter-term insurance. Your policy will be steady and give you increased returns as you age.
Get Help When Deciding How To Choose Life Insurance
Before you head off into the wild to choose life insurance, you should ask for help in deciding how to choose life insurance. Life insurance is a personal and important choice to make for yourself or your family. Choose carefully so that you can provide everyone around you what they need to have the future they deserve, even after you're gone.
If you're still a millennial and wondering what you need to know about life insurance, check out our latest guide for tips.