One of the best investments you can make in your family is to make sure that you are covered with a life insurance policy. While talking about life insurance and wills are not comfortable subjects, they are crucial to ensure the financial security of your loved ones. The purpose of life insurance is to replace your income so that your family can have financial stability in a time of need.
Frequently Asked Questions and my recommendations:
What type of Life Insurance Policy should I get? – I feel strongly about life insurance and I will only sell the kind that pays the lowest commission to the agent (me), but makes the most financial sense to the individual – Term Life. Term Life insurance covers you for specific amount of money for a specific amount of time and is not a tool for investing like Whole Life or Variable Life policies. Whole Life is much more expensive and makes the insurance agent a lot of money which is the main reason it is pushed heavily. My wife and I have Term Life policies on ourselves because it offers a lot of coverage at a relatively small cost.
Who needs Life Insurance? – Life insurance is intended to replace the lost income and pay off the debts of the insured so that the dependents will not be left with a financial hardship. If you have kids at home, a mortgage on the house, or don’t have a huge nest egg built up yet you need life insurance. Once your kids are grown and gone, the house is paid for and you’ve accumulated some wealth, a life insurance policy is no longer a necessity.
What if my employer provides Life Insurance? – If your life insurance is through your current employer, consider what will happen when you change companies since the average person stays with the same company for about 7 years. Once you change employers, you will be older and possibly less insurable since most term life insurance policies require you to pass a health screening before they will insure you. You would be best served to have an insurance policy separate from your employment so you have 100% control and your life insurance is not dependent on your employment as well. The upside to an employer provided policy is that they usually don’t require a health screening for the lower amounts of coverage which is good for someone in the middle of serious health issues.
How much Life Insurance do I need? – Since Life insurance is a tool to replace income, you should have 10-12 times your annual income plus enough to pay off all debts. Let’s say you make $50,000 a year, have no debt, and something happened. If you have a $600,000 life insurance policy, your spouse could cover the final expenses and still have enough to put into a modest investment earning 8-10% per year and effectively replace the lost income without touching the principal.
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