It may seem like an obvious statement, but almost everyone needs life insurance. But choosing the right life insurance for you is not thought of to be as important a decision as, say, finding the right mortgage plan.
Even if you have no dependants or people living with you, you should still consider life insurance if you are an adult; after all, who will pay for your burial costs?
So, the real question is what type and how much life insurance should you apply for?
The article, “ Life Insurance: How Much and What Kind?” written by David N. Barkhausen and released on lifeinsuranceinc.com, provides some insight as to how to determine which policy fits your needs and lifestyle.
Just thinking about life insurance makes many people feel uncomfortable. No one wants to consider the possibility of premature death.
However, it is interesting that the second people purchase a car or home, they get insurance coverage, while the most important thing they have (their own life) usually does not get insured until they are sick and premiums are much higher.
Once you realize the importance of life insurance, the first thing to consider is how much financial coverage is enough.
An adequate amount of insurance coverage that you should apply for should cover a portion of the income your family or dependants are accustomed to receiving from you. You have to also consider inflation when figuring out the financial amount.
“Consequently, with a 3 percent inflation rate, the amount of pre-tax income generated each year, even with an 8 percent rate of return, could only be about 5 percent of capital, because 3 percent would need to be reinvested as capital to have future income keep pace with inflation. Assume, for example, the goal is $100,000 of replacement income before taxes, increasing with inflation. At a 5 percent rate of return, $2 million would be required in the form of insurance and other liquid assets. The capital need for replacement income, using the 5 percent income rate of return assumption, is therefore calculated by multiplying the pre-tax replacement income need by 20.”
That may be a little confusing to calculate, so basically, just try and get the most coverage possible within a reasonable monthly premium because you may also have to think about your child’s education or wedding costs. If you still need help deciding a dollar amount, apply for five times your annual salary. So, if you earn $60,000 per year, you should apply for a $300,000 life insurance policy.
Now you have to decide which type of life insurance policy to apply for.
Your work place may offer group life insurance. You should probably stay away from this option because your plan will terminate if you change jobs. Even if you are certain you will stay with your current employer forever, you never really know and you do not want to deal with the stress of staying with a job, because of your life insurance policy, if you are offered a better option elsewhere.
This leaves you with a personal life insurance policy. In determining which personal plan to choose, it is wise to focus on long term costs.
“Many companies will try to lure you in with a low-ball initial premium, when the longer-term rates may greatly exceed the premiums of a policy with a somewhat higher first year cost. In addition, do not buy 10-year level term if your needs may last longer (they almost always will). Premiums go through the roof on these polices when the ten years are over, and you may not qualify for another favorable 10-year rate.”
There are many things that will be stipulated in a life insurance policy that you should familiarize yourself with. This being said, read everything in your proposed policy. You do not want to be surprised with any hidden fees or contingencies.
The main thing to consider when choosing the right plan is to focus on long term finances and coverage. Even if you are sick, you can never plan your premature death.
Other Articles:
Life Insurance 101 |
