Life insurance is a must, especially if you have dependents. It will provide your loved ones with tax-free compensation after your death, ultimately giving them an opportunity to continue moving towards their financial goals. There are three types of life insurance; whole life insurance, universal and term life insurance. All types have their advantages and disadvantages, but it’s important to look into getting a policy.
Types of Life Insurance
Whole life insurance will last until you pass away, as long as you continue to pay the premiums. Sometimes you may be able to take money back; however, it will reduce your overall death benefit.
With universal life insurance, you’ll have more flexibility with taking money out, and you’ll be allowed to borrow money. Although, if there’s any outstanding debt, the death benefit may be significantly affected.
Lastly, term life insurance promises a death benefit within a certain term. Once the term expires, the policyholder must renew for another term, or convert to permanent coverage, or terminate the policy.
There are some obvious advantages to getting life insurance. For one, it could help pay off any lingering debt, rent or mortgage, or even for a beneficiary’s finances. Further, life insurance will give you and your family peace of mind. In fact, depending on the type of policy you get, life insurance usually isn’t that expensive. The process is easy and it’s usually tax-free; so, you won’t have to worry about calculating how much your beneficiaries will receive after taxes.
For whole life insurance specifically, it never expires, won’t go down in value, and the rate you pay will never change. Further, a whole life policy is appealing because it cannot be revoked or canceled. Also, since a whole life insurance policy is permanent, your health at the time the policy is issued will determine your insurance coverage for the rest of your life. Last and most important, the death benefit is guaranteed.
Next, universal life insurance is designed to offer more flexibility than whole life, premiums can be adjusted to fit current financial needs. In fact, since cash value grows at a variable rate, higher returns are possible. You’ll have more opportunities to increase the policy’s cash value. Lastly, you’ll be able to take out money without qualifying for a loan, repaying the loan, and they’re tax-free.
Lastly, for term life insurance, it’s typically more straightforward and easier to understand. It’s also the most affordable type of life insurance and guarantees a death benefit. Finally, you can cancel a term policy before it expires without losing value.
There are only a few downsides to getting life insurance. First, it costs money- but so does everything else! Second, it forces you to think about all the past debt you have and the debt that could potentially outlive you.
Whole life insurance has a few cons; one, it generally has higher premiums than term insurance (at least when the policyholder is young). Two, the growth of the cash value will most likely be much less than investments you could make elsewhere. Lastly, whole life insurance can be confusing.
Term life insurance has only one major disadvantage; that is that eventually, the policy will expire. This means you’ll have to look for a new policy or convert your current policy into a permanent life insurance policy.
Last, universal life insurance typically has high fees. While the returns earned can be high, it costs a lot to get there and the universal policies aren’t that flexible. Another downside is, when you borrow money, it takes away from the death benefit. Further, your cash value saving can deteriorate as you age, diminishing your cash value.
Permanent life insurance has quite a few cons. However, the biggest disadvantage of all is that permanent life insurance is 6-8 times more expensive. So, because it’s so expensive, people tend to buy less coverage than they need. Or, they’ll end up getting rid of the policy early. In fact, universal life insurance policies aren’t too popular because most don’t need permanent life insurance.
How Much Coverage is Necessary?
Pinpointing exactly how much life insurance you should buy is impossible. However, there are ways that you can make an estimate. In order to do so, there are eight steps you should take:
- Calculate how much annual income will have to be replaced after you’re gone.
- Decide how many years you want your annual income to be replaced.
- Add up the total amount of debt.
- Decide how much money you want to provide for your children’s education.
- Calculate any funeral expenses.
- Add up the amount of money in savings and investment accounts.
- Include the amount of current life insurance.
- Calculate the family’s annual income, in addition to your income, after-tax.