Is Life Insurance Right for Me?
Life insurance provides money to your family or loved ones if you should die. Life insurance can also help protect the financial interests of a business if a key employee should die. Here, we will discuss the use of life insurance for your family.
Now, no one likes to think about the consequences of their death. Yet, people die of accidents and diseases every single day. Around 2.5 million people in the United States die every year. While diseases lead the list of causes, over 100,000 people die every year of accidental causes.
If you have family members that depend on your earning power, the important question you must ask yourself is, "What will happen to them if I am no longer around to provide for them?"
And, you must ask that question now, before you die of an accident or are diagnosed with a deadly disease. Once you are involved in a deadly accident, it's to late to obtain life insurance. And, once you are diagnosed with a deadly disease it's awfully hard to obtain life insurance.
Life insurance can protect and provide for your family in a number of ways:
- Pay off debts
- Provide care and education of your children
- Provide needed money before your spouse can make up for your lost income
=== Life Insurance Can Pay Off Debts ===
Many families live in a home with a substantial mortgage. Your mortgage typically represents your greatest debt. Your income is probably what provides the money to pay your mortgage payment. Life insurance can be used to pay off that mortgage debt if your income is lost.
Millions of families have a large credit card debt. They often cannot pay off their credit cards every month. Those families that seldom pay off their credit cards have an average debt of nearly $8,000. And, many families that declare bankruptcy have tens of thousands of dollars in credit card debt. Life insurance can be used to pay off that credit card debt.
=== Life Insurance Can Help Pay for the Care and Education of Your Children ===
If you are a family with "special needs" children, you may be paying for special tutoring or child care. These expenses will continue beyond your untimely death. Life insurance can help provide for your child's special needs. This help could continue for quite some time.
A university education often costs $20,000 a year or more. Your savings and investments over the years could help pay that cost. But, if your income stops before those investments can grow to help your children with their education expenses, your children will have less money available to get them through their university education. Life insurance can be used to help provide the educational costs of tuition, books, fees, and living expenses.
=== Life Insurance Helps Your Spouse ===
Your spouse may or may not be able to make up for your lost income. Depending on your spouse's age or other circumstances, your spouse may:
- Re-marry and gain another source of income.
- Wait until a pension and/or Social Security provides an additional income stream.
- Increase income from employment or entrepreneurial efforts.
Life insurance can help your spouse make the transition from the time of your death to the time of a new income stream. While life insurance sales people often want you consider your family's lifetime income requirements, this is often beyond what is really required.
You need to consider how large an income stream your spouse needs and for how long before a successful transition to another source of income can be made. The face value of your life insurance can be tailored to help provide the income stream through this interim period.
Typically, as you become older and income from pensions and Social Security are closer at hand, your need for life insurance decreases. And, if you have built up sufficient financial resources, your need for life insurance is almost non-existent.
=== Types of Life Insurance ===
There are two basic types of life insurance:
- Term Life Insurance
- Whole Life Insurance
Term life insurance is simply a contract that calls for you to pay a premium for a certain number of years for a certain face value of life insurance. The length of the contract can vary from 1 to 30 years. If your term policy ends without your death, you receive no benefits. If you die before your policy ends, you survivors receive the full face value of the insurance.
Some term life policies are called "decreasing term" because the face value of the policy decreases over the years. Term life insurance policies are often "renewable" when they expire, allowing you to get another policy of term life insurance without a new physical examination.
Whole life insurance is a long term policy in which you pay premiums that provide for both life insurance and a "cash value" investment plan. When the policy is surrendered, it either pays the face value death benefit (if you die) or the "cash value" of the policy. Often the "cash value" of your policy is determined by a fixed rate of return on your premium payments. After some initial period, you can borrow against the cash value of the policy. The premiums for whole life insurance are higher than for term life insurance.
Whole life insurance is also offered with some variations in premium payments and face value amount. Such variable plans can be called universal life insurance, variable life insurance, or other names.
Several factors are important when considering whole life insurance. You should clearly understand:
- When Cash Value Begins to Build -- Often whole life insurance policies do not allocate much of your premium to begin building a significant cash value before you've paid into the policy for 10 years or more.
- Rate of Return -- The rate at which your policy builds cash value is often below the rate you could get if you invested elsewhere.
You should carefully investigate both term life insurance and whole life insurance plans. It is often wise to consider buying a term life insurance policy and investing the excess of what the whole life insurance policy would cost. That way you would have the benefit of both life insurance and a higher rate of return on your investments.