Understand Your Life Insurance

life-ins.jpg
RubAn Hidalgo/E+/Getty Images

Definition:

Life insurance is a policy that will pay money to a named beneficiary upon your death. Life insurance is a way to help protect your loved ones if you were to die suddenly. It provides money to help pay from medical expenses, funeral costs and living expenses. When you purchase the policy, you determine the amount that you are covered. There are different types of life insurance available.

It is important to understand the different types of policies and to determine how much life insurance you actually need.

When Should I Get Life Insurance?

You may not need life insurance if you are single and have no dependents. You may qualify for a small policy through your employer that will cover the basic burial expenses. Once you are a parent or you are married, you should consider getting life insurance. The life insurance will help cover expenses and make sure that your loved ones are taken care of if something happens to you. If you are responsible for someone, you may also want to consider getting life insurance. For example, if you take on guardianship of your brothers or sisters, it would make sense to get life insurance to protect them if something were to happen to you. 

Choosing the Right Amount

The amount of life insurance you need depends on your situation in life. If you are single and childless the amount offered by your employer should cover your burial expenses for your family.

If you are married or have children, you should increase the amount that you have. Generally, you want enough insurance so that your family can live off of the interest that amount will earn in interest. You will need to determine how much your family will need annually and then work backward to figure out how much life insurance you should take out.

You may also want to add enough to pay off any debts and your mortgage and to fund your children's education. As your life situation changes, your life insurance needs will change. You can use term policies to make the adjustments that you need to the amount of insurance that you carry. This can be part of your long-term family financial plan. Until you are married or have dependents, you do not need to carry very much life insurance. However, there is​ no excuse for not having life insurance if you have people relying on you.

Choosing the Right Type of Life Insurance

Once you have determined the amount that you need, it is important to choose the best type of life insurance for your situation. There are two basic types of life insurance: term and whole life insurance. They offer different benefits.

Term Life Insurance

Term life insurance is a policy that you purchase for a certain number of years. The rates are significantly lower than whole life insurance. You can purchase this at varying amounts for a set amount of time. Common lengths of time include 10, 20 and 30 year policies. If you choose term life, you should self-insure by the end of the policy or plan on taking out a new policy.

This means that you have enough in savings and your family is in a position in which it would not need life insurance to continue the same standard of living. This is generally the most affordable option and it may be the best option for your family. 

Whole Life Insurance

Whole life insurance is a policy that follows you throughout your life. You pay a premium for this insurance from the day you purchase it for your entire life. Whole life insurance is often sold as an investment, because you can draw the money out of it, that you have put in. In reality, you are paying much higher rates for whole life insurance, and you are getting a poor investment in return. If you went with term insurance instead, and simply invested the difference in mutual funds, you would be much better off. Universal and variable life insurance is another form of whole life insurance.

Your insurance may contact you about converting a term policy into a whole life policy, and you should avoid doing that. In fact you may want to switch your whole life insurance policy into a term life policy.