life insurance

Planning for the Worst: How to Buy Life Insurance

Take Care of Your Family

As you continue to manage and grow your personal finances, you will most likely come across the option of purchasing life insurance for yourself and your loved ones. It can be an uncomfortable topic; however, it may be an essential part of planning for the worst of times.

What Is Life Insurance?

Insurance involves creating a pool of funds to pay for potential risks among a large group of members. In this case, life insurance pays out a lump sum of money in the event of the death of the insured person. A death benefit paid by the insurance policy is aimed at providing the survivors of the insured, such as their family, with financial support through this devastating time.

As with other types of insurance, there are different types of life insurance plans. The major distinction between the available plans is a term policy versus a permanent policy.

The cost of these policies will range depending on the type of plan, your age, your health, any preexisting conditions in your family, and more. Essentially, the healthier and younger you are, the less life insurance should cost you.

Term Life Insurance

The term is the designated period that the life insurance policy is valid.

Policy Characteristics

A term life insurance policy is the most common type of insurance. These are the normal characteristics of such a policy:

  • Inexpensive, with fixed monthly payments.
  • Available for different amounts of time (10, 20 or 30 years).
  • Provides a predetermined death benefit amount.

For example, you could purchase a $100,000 20-Year Policy that costs $10 per month. From the moment you purchase the plan, you will pay a monthly premium of $10. In the event that the worst happens, and you do pass away within those 20 years, then your beneficiary (who you determine to get the death benefit) will receive a check for $100,000.

If the best happens and you are still healthy after that 20-year period ends, you will have two choices:

  • Continue the life insurance by purchasing additional time or upgrading the policy to a permanent plan.
  • End the policy, which means that you will not get any future coverage and will not get your paid premiums back.

Financial Benefits

The financial benefits behind a term life insurance policy are straightforward. For a low price per month, you will have the assurance that in the worst of times, your loved ones will have financial help. This type of plan is normally seen as an income replacement strategy, which is important if you have people depending on your income to live.

In terms of your own financial benefits, there are none. If the death benefit is paid, you will of course not be able to benefit from that. If all goes well and the plan ends without paying out a death benefit, you will have lost those monthly payments.

Why Should You Get Term Life Insurance?

You should consider getting term life insurance if you want to provide an emergency fund for your loved ones. The death benefit paid out from these policies can help them pay for funeral expenses and provide them with assistance while rebuilding their personal finances without you.

It can also be useful in the following situations:

  • When purchasing a home. This will help ensure your debts will be taken care of in case you are no longer there to pay them off, rather than being passed on to your relatives.
  • When your dependents are prone to illness. Purchasing life insurance for your own dependents can help provide you with financial support for their upcoming medical procedures.
  • When starting a business. A term life insurance plan can ensure the continuity of your business in the event that you are no longer there to carry on the company.

Permanent Life Insurance

Life insurance can also be used as a retirement strategy, where the policy will end up paying an annuity if you live past the death benefit window.

Policy Characteristics

A permanent life insurance policy usually:

  • Requires higher monthly premium payments than term.
  • Combines a death benefit with a savings portion (the cash value).

They can be seen as initial investments toward potential retirement income.

Financial Benefits

The idea behind permanent life insurance policies is to create deferred annuity (fixed) payments for later. Your premium payments will be used to invest and build cash for your retirement savings.

A Whole Life Guaranteed to 65 Policy means that you pay a monthly premium from the purchase date to your 65th birthday. At a certain point in the policy, you can pull out cash based on the policy's accumulated cash value. Ideally, though, you would wait until retirement to then pull out fixed annuities, or payments, from your plan. Of course, similar to all other life insurance policies, if you do pass away in a certain period, your beneficiaries will receive the agreed-upon death benefit amount.

Why Should You Get Permanent Life Insurance?

Permanent life insurance policies could be for you if you wish to:

  • Assure that loved ones will be financially secure in the event that you leave them behind.
  • Be able to also build up your retirement nest egg if you end up living a long and healthy life.

Where to Buy Life Insurance

Similar to health insurance, life insurance can be available through work or privately purchased.

Work-Provided Life Insurance

Work insurance plans can be very inexpensive or even free. However, these plans should only be seen as a temporary strategy, as they are normally only valid while you are working for that employer.

When choosing to opt-in for a life insurance policy through your work, make sure you understand the benefits, who is covered, any underlying conditions and whether you can keep the plan even if you end up working somewhere else.

Private Life Insurance Companies

Even if you have a life insurance policy through work, it may be wise for your personal financial situation to invest in additional life insurance. You can compare different insurance providers and quotes using online comparison sites to help you understand what is a good fit for your budget.