Life insurance policies are of the utmost importance when you have a family. If you’re the sole breadwinner and you’re “no longer here”, you’d want to make sure that your family can afford to pay off the burial fees, mortgage, and perhaps put your kids through college. Since your family will be grieving for you, you don’t want to make matters worse by having them stressed about money matters.
However, life insurance isn’t as simple as ABC. There are many types of life insurance to choose from, with prices ranging from just a few hundred to a few thousand dollars a year. You would think that more is better, but that’s not always the case.
In this article, we’ll take a look at some key aspects you need to consider when buying a life insurance policy.
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Your Goals
This varies greatly from person to person. Are you a young couple with older children that just need enough income replacement until your children leave the nest? Perhaps a 30-year term life insurance would do. After the term ends, the policy is terminated unless you renew it. For most people, this type of life insurance gives the best value for money.
If you’re an older couple that is expecting nursing care in the future and would need the extra savings to borrow against, whole life or universal life insurance may fit your needs better. However, this is a much more expensive option but you don’t have to worry about renewing your policy.
Whatever the situation may be, you need to have a frank discussion with your spouse and do your research thoroughly. Websites like Policyscout allow you to compare insurance plans and find the best coverages that fit your needs.
Affordability
You may have the purest of intentions and want to give your family the most coverage they can receive when you die. However, you’ll need to remember that premiums go up with coverage, and life insurance is a long-term investment.
When times get tough, people skip paying their monthly premiums to save some money. Depending on your policy, it may be terminated if you fall behind on payments after a period of time with no option of renewal.
With this in mind, choose a policy you can afford to pay even on those rainy days. Insurance companies suggest coverage of six to 10 times your annual salary. Meaning, if you earn $100,000 annually, get coverage of at least $600,000.
On average, if you’re a 40-year-old male going for a 20-year term life policy, this would set you back $789/year. However, this six to 10 times rule is vague, and you should consult your financial planner for an accurate number that reflects your financial circumstances.
Payout Time
No two insurance policies are exactly the same. Most people prioritize the coverage and premiums, but not many look into how quickly a policy will pay the beneficiaries (death benefit) after they file a claim.
It may be as quick as a week to as long as two to three months (60-90 days). This is assuming that your beneficiaries file their claims as soon as possible and provide the right documentation.
However, be cautious of life insurance policies that have low barriers to entry such as the simplified issue life insurance. This insurance type serves people who want to obtain life insurance right away without having to undergo strict medical exams.
It may sound like a steal, but keep in mind that it can take two to three years for it to payout 100% of it’s covered amount. If your family needs all the money quickly, this might not be the best option.
