Understanding Why You Need Insurance
Many families understand that life insurance is beneficial to their financial security, whenever there is the death of a parent or spouse. Life insurance offers protection to help the family pay for a college education, mortgages, retirement fund, or monthly bills.
If the family is dependent on the income from a parent for ongoing support, they need to choose a beneficial life insurance policy. Even families that do not have immediate needs often consider a “starter” policy. This is because the monthly premium of the insurance policy is much less when you are young.
Understanding What You Need
Life insurance will pay out a lump sum benefit at the death of the insured. Financial planners will often calculate the amount of coverage a typical family will require. However, multiplying the annual salary of the household by eight is usually a good rule of thumb.
For a more detailed analysis, simply add up all of the expenses paid out every month. In addition, include all one-time expenses that will be incurred upon the death including funeral and burial costs. Take into account ongoing expenses including monthly bills, the mortgage, and school expenses. Finally, take the total of this number and divide it by 0.07%. This amount represents the total amount of the life insurance policy needed to generate approximately 7% every year to pay all of the families expenses.
Term Insurance vs. Permanent Insurance
Once your family has a firm understanding of exactly how much insurance you need, you will be offered two different basic options – term insurance and permanent (whole) insurance. Term insurance costs significantly less over the life of the policy. This is because this type of insurance is usually renewable and often comes with convertibility clauses to make changes in the future. Usually, if you are healthy, it is pretty easy to find cheap term life insurance to protect your family.
Alternatively, permanent (whole) insurance is usually more expensive because it maintains a monetary value that grows over time. The funds in a whole life policy can be borrowed against or cashed out before death. There are specific situations where one type of policy will be significantly more advantageous over the other, based on your family’s circumstances.
Your family’s insurance planning does not need to be complicated. The policy should be based on your family needs and budget. Before signing anything, make sure you understand the details of the contract and policy.