Life Insurance Basics

July 13, 2010

How important is life insurance? Many people think they can go without it. However, for most people it’s a necessity. Here is some advice about the basics of life insurance.

For some people, it’s more critical than others. For instance, if you are in your twenties and have no financial dependents, there is little point in getting it. On the other hand, if you do have people relying on you financially, then it definitely would be wise. The only time it wouldn’t be worth it is if you have enough savings to cover all expenses after you die. However, this is very rare.

Remember, if your kids are younger, they might need the money for 10-15 years before they are ready to support themselves. How many people have enough money to comfortably support their families for this long? Money is also very important for covering college costs.

And don’t forget funeral expenses. These can be extremely high – in many instances the costs can be $10,000 or more. And fortunately life insurance covers them. That’s not the main reason to get a policy, but it is a huge benefit.

How much coverage should you get? A good rule of thumb is to get roughly eight to ten times what your annual income is. This will ensure your kids have enough money to maintain the current standard of living for a long time.

However, if you have a lot of debt, you might want even more. On the other hand, if you have a ton of savings, you might want less.

What kind of coverage is best?

There are basically two kinds of life insurance – term and whole. Whole insurance is much more expensive. This is used as an investment vehicle, in addition to providing coverage. Therefore, a certain percentage of the money you pay per month is put towards your investments. However, the reality is, they don’t gain anywhere close to what a mutual fund would. The investments usually don’t get more than a 5% return, as compared to 10% or more for a mutual fund.

You are also locked into having the policy for the rest of your life. Often times the company will have a maximum premium you have to pay during the course of the policy. This just guarantees you will not have to pay more than that during the whole policy.

This is a distinct advantage over term. With term coverage, often times the rates increase dramatically if you have some sort of health problem before the policy is over. When it comes time to apply for your next coverage, the prices will either go up dramatically, or you will get rejected for coverage altogether.

The bottom line is, life insurance is very necessary. Just determine how much coverage you need based on your income, savings and debt, and you will be ready for an emergency.

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