When you're single or newly married, buying life insurance is likely the farthest thing from your mind. Once you have children, though, there's no doubt that life as you know it has changed forever. While raising a family is an exciting part of life, it's not a time to ignore the fact that one or both parents may die unexpectedly, leaving behind family who'll have a hard time surviving without extra support. Buying life insurance is an important endeavor, but it can be fraught with questions and anxiety. This article will help you find answers to essential life insurance questions -- what kind of insurance is right for you, how much you should buy and for how long -- as well as assist you in your search for the right insurance provider.
Types of Life Insurance
There are two major types of life insurance: term life and whole life. Term is the most popular and most affordable form of life insurance. Term life insurance is established for a set time period -- which can be for as little as one year or up to 30 years. You pay a set amount (called a premium) for the term you've established with the insurance company. Your premium is paid either monthly, quarterly or yearly. If you're alive when the policy expires, you may have to look for coverage again. You may be able to buy an extension on your policy, but it depends on your insurance company and your personal health and age.
Whole life insurance is much more expensive than term life insurance, and it covers you for your entire life. Whole life is a blend of insurance coverage mixed with an investment fund, where part of your premium goes toward investments made by the insurance company. You pay a certain amount of money each month (also called a premium), and part of that money accumulates into an investment account. As you build cash value within your policy, you can borrow against the value and take out a loan, which will be deducted from your death premium. Or, you can leave the money in the account, and the money will accrue until you've paid the entire value of the policy.
Determining Your Policy's Value
So, exactly how much life insurance you should buy? There's no set dollar amount. You should definitely make sure you won't be underinsured so that your family is covered for as long as they need. Insurance agents will usually tell you to buy anywhere from 10 to 20 times your annual income, and specifically determining what the monetary value of your insurance policy should be is based on a several factors -- your salary, the age of your dependents, other assets that they may use to live on and if you have an employed spouse.
Next, you need to determine how long you'll need your policy. With term life insurance, the general guideline is to purchase coverage to get your youngest child to about age 22, when most young adults begin supporting themselves. Remember, life insurance gets more expensive as you age, so if you're buying insurance in your 30s, you'll be paying a lot less than if you try to buy a policy in your 60s. If you want to cover your spouse in your insurance plan as well, plan on having coverage until your spouse reaches retirement age.
Regardless of the policy you choose, if you don't pay your insurance premium on time, your insurance will be cancelled, and you may have to start the process over again.
Designating a Life Insurance Beneficiary
An important aspect of maintaining life insurance as a parent is designating the proper beneficiary. A beneficiary is the person or entity who will receive the death benefit from your insurance policy. You have to be very careful about who you name as your beneficiary, as well as maintain the beneficiary's contact information with the insurance company, so that person can be notified in the event of your death.
Following are commonly-selected beneficiaries:
- Your spouse -- Logically, your spouse would be your beneficiary, unless he or she is so financially independent support isn't needed. Make sure, though, that you keep your policy up to date. If you divorce or remarry, be sure to update your policy to change your beneficiary's name.
- Your child or children -- It's natural to think about designating a child or children as beneficiaries, even if they are minors. However, a minor should never be made a beneficiary. A minor will not have the legal authority necessary to make financial decisions needed to execute an insurance policy, and they can't legally sign checks. If a minor is made beneficiary, the policy will go to a judge, which can tie up your death benefit at a time when it will probably be urgently needed.
- The trustee of a family trust -- A trust is a legal mechanism to protect your assets. If you name a trust as your beneficiary, the insurance policy becomes an asset within the trust upon your death. The person in charge of managing the trust (the trustee) should be someone who you believe will act responsibly on your family's behalf.
Children's Life Insurance
While it's important for parents to buy life insurance, there are also life insurance options for children. It seems like a logical decision -- now that you have a child, they should also be insured in case of death, right? But is it worth investing your money for kiddie life insurance? Policies are inexpensive, and insurance companies draw you in with tearjerker commercials and fear of the unknown in case a child passes away.
Experts overwhelmingly recommend is that it's not worth buying children's life insurance. Why? Policies mature very slowly for children, and a parent is more likely to die before a child. It's much smarter and financially responsible to make sure a parent is adequately insured rather than the child.
Tips for Finding the Best Life Insurance Rates
Wading through the vast amount of information regarding insurance can be daunting. If you don't know where to begin, here are some tips to finding the best insurance rates for you and your family:
- Shop around. You never know what may be the best fit for your insurance needs if you don't do your research. Web sites such as EHealthInsurance.com, SelectQuote.com and AccuQuote.com help walk you through finding the best policies for your needs. They represent major life insurance backers -- without having to deal with an agent.
- Buy life insurance when you're younger and healthier. It may be difficult for you later in life to get an adequate insurance policy when you're older and your health may be compromised.
- Buy from a financially sound company. There are a vast number of major financial organizations and insurance companies that are stable and secure, but do your homework before you settle on which company to use.
- Decide whether you want to use an insurance agent or buy on your own. You may be surprised at how much money you'll save if you go it alone, but it's usually easier when you have a middleman. It doesn't cost you anything to speak with an insurance representative, so don't be afraid to make initial inquiries about buying a policy.
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