Life insurance is one of the foundational pillars of a sound financial plan. It is vital for most people, but there is often debate over the subject. The complexity surrounding these policies is partly to blame, but it doesn’t have to be confusing. There are plenty of tools online that can help you estimate the amount of extra coverage you need for your situation. A good rule of thumb is to multiply the wage earner’s annual income by 15. You can ask about any riders or living benefits that can be added if you need extra coverage that goes beyond just death benefits. Choosing the right policy can be a complex piece of financial planning, but you don’t have to tackle it alone, as an insurance professional will be able to help. If you decide down the road you no longer need the policy, you can also cash in with a life settlement. In order to get started though, you can understand a few pieces that you should know.
If You Have Dependents, then Adequate Coverage is a Necessity
Extra coverage is obligatory for anyone who has a spouse or young children who are dependent on them. Taking care of your family after an accident is the primary purpose of having a coverage policy with death benefits. Even if you have no dependents though, extra coverage may be a strategic financial tool you can use to your benefit.
There is a Contract Between Entities
An insurance policy is a contract between the policyholder and the insurance company. The insurance company pools the premiums of all policyholders and pays out claims for those that pass away. Insurance companies can make a profit if they take in more premium payments than they pay out in death benefits.
It is a Risk Management Tool, Rather than an Investment
Some policies have an investment component, but these policies should not be thought of as an investment. A coverage plan should be thought of as a tool to manage risk for you and your family, rather than a way to make investments in your future. There are far more efficient investment tools than any policy with an investment component.
Term and Permanent Coverage are Different Sides of the Same Coin
Both term and whole life insurance policies offer benefits upon death, but the conditions are different. A term policy only lasts for the stated term, whether that is 10 to 30 years. Premiums for term policies are guaranteed for the length of the term and will not raise rates at all. Permanent life insurance includes a savings mechanism or a cash value associated with the policy. That is because a permanent policy will pay benefits as long as the premiums are kept up-to-date. Whole policies often have an investment component that works like bonds or CDs.
You Need More Coverage than you Think
Many people vastly underestimate the amount of extra coverage they need for their financial situation. Generally, a policy should be enough to cover at least six months of living expenses, the remaining balance on a mortgage, and any education costs you anticipate for your children down the road.