Life insurance is one of those purchases that you might not know why you need it, just that you probably need it, and the amount you require depends on several factors. The main purpose of life insurance is to provide a replacement for your income for your dependents in the event of your death. Young families and middle-aged couples are great candidates for life insurance, but even if you don’t fall into either of these categories, life insurance may still be a wise purchase. Read on to learn more about the types of life insurance policies available, the people most in need of life insurance and how to determine the coverage you require.
Types of Life Insurance Policies
There are two main types of life insurance available: term and permanent life insurance. Permanent life insurance breaks down into three varieties, including whole, universal and variable universal. To choose the one that’s right for you, consider the death benefits, flexibility and tax advantages.
- Term life insurance offers the lowest premium prices and protects your dependents if you die anytime during the term, which is when the policy is in effect. Terms normally range from 1–30 years.
- Whole life insurance provides a guaranteed death benefit in addition to its investment component. This allows you to accumulate tax-deferred cash value that you can borrow from against the policy.
- Universal life insurance builds cash value over time. Added benefits include having the flexibility of setting your monthly premium and death benefit while gaining tax-deferred earnings.
- Variable universal life insurance has all the benefits of universal life but with a cash value that’s dependent on your policy’s investment returns. Your premiums are invested according to your wishes, and you gain tax-deferred earnings.
Groups That Need Life Insurance
Each type of life insurance has its own benefits and drawbacks, making some types better suited for certain people than other types. To learn more about which policy might be the most effective choice for you, consider the following summary.
Breadwinners
Life insurance can provide “income replacement” so that your family can continue to pay everyday expenses after you die. Term life is the right option to cover your working years and replace your income.
Stay-at-Home Parents
Life insurance in this case covers the cost of paying for services you do as part of your stay-home duties, such as childcare. Term life is the ideal option because you can choose a policy that’s long enough to cover your duties while your children are young.
Divorced Parents
A policy can cover the support payments that you make as a divorced parent. Term life is ideal to replace the missing income for the number of years you would otherwise be making support payments.
Parents of Special-Needs Children
Making sure your child is set with financial support throughout his or her life is essential for peace of mind. Permanent life insurance, such as whole or universal life, is ideal because it provides a payout no matter when you die.
Homeowners with Mortgages
The benefits from a life insurance policy can be used to pay your mortgage, which gives your family the option to stay in the home if you die. Time a term life insurance policy to match the years on your mortgage loan.
Single Individuals
In general, singles don’t have anyone depending on their income, which means that they don’t really need life insurance. One exception to the rule includes anyone who’s taking care of aging parents or other family members. If you carry a large amount of debt and the debt — such as student loans or credit cards — has a cosigner who becomes responsible to pay the remaining balances in the event of your death, you should purchase a policy. Term life can take care of all those expenses.
High Net Worth Individuals
Even if you have a large net worth, a life insurance policy can make it easier for your heirs to settle inheritance and estate taxes. Permanent life insurance is the right option if you want to provide funds to solve any estate tax concerns.
Individuals Who Want to Provide an Inheritance
In the absence of accumulated wealth, the benefits paid out when you die could set your beneficiaries up with a tidy sum. Permanent life insurance is ideal because it pays benefits no matter when you die.
Business Owners
Look for a life insurance policy that provides enough funds to satisfy any and all business debts, pay estate taxes or fund buy-sell agreements that let your business partner purchase your share in the business. Both term and permanent life insurance work in these instances, depending on the situation.
Investors with Retirement Concerns
Look for a life insurance policy that builds cash value. Permanent life insurance types such as whole, universal and variable universal provide earnings that you can use to supplement your retirement accounts.
Anyone Concerned with Funeral Expenses
Small life insurance policies, sometimes called “final expense” or “burial” insurance, provide the funds to cover your funeral and interment expenses. Permanent life insurance policies are typically the ideal option, and some even offer guaranteed acceptance regardless of your health.
How Much Life Insurance Do You Need?
To figure out how much life insurance you need, use the DIME formula, which examines your debt, income, mortgage and education needs to give you a more comprehensive picture of the amount of life insurance you require.
Start by adding up your debts, excluding your mortgage and the estimated cost of your funeral and burial expenses. Determine the number of years your family needs to rely on your income replacement, and multiply your annual income by that number. Add in the payoff figure for your mortgage and the estimated costs of sending your children to college. If you want to get more detailed, subtract any other life insurance policies you have, along with assets such as savings. The sum of these figures is the recommended amount of life insurance coverage you should purchase.
