Many people recognize the need for life insurance, but they don’t take the next step because they feel they don’t have a safe, pressure-free place to start. Here’s what you should know.
1. If you have dependents — you need it
If you have children or other loved ones who depend on the money you earn, you need life insurance. Its primary purpose is to protect your income. Life insurance helps your dependents keep on living as they would if you were still earning a paycheck.2. Life insurance helps replace your paycheck if you aren’t there to earn it
If you’re looking for a reasonable estimate on the amount of life insurance you should buy, start by multiplying 60% of your annual income times the number of years to retirement. This takes your salary, assumes some normal raises over time, and adds the value of your employee benefits, like healthcare. Then subtract the effect of taxes, and what it costs your family to have you around.3. Some life insurance is better than no life insurance
A good starting place is coverage that equals any outstanding debt (including mortgage, car payments and student loans) + 5 years of annual salary. Use the average American salary, $40,000, to represent your income in your estimate if you’re a stay-at-home parent or currently in-between jobs.4. Life insurance is less expensive than you think Many people think
life insurance is much more expensive than it actually is. In fact, many people can get term coverage from a reputable company for a surprisingly low price. A healthy 35 year old can pay as little as $30 a month for $500K of coverage. Life insurance does get more expensive as you get older. It makes sense to buy as much as you may need while you’re young and healthy.5. Life insurance is a smart financial move
If you’re looking for a recommended amount of coverage, you can expect to pay about 1% of your annual salary on the annual cost of term life insurance. (Spending 1% of your income to protect years of income is a pretty good deal.)6. Make sure you know how much life insurance you get at work
Many people assume they have more coverage at work than they really do. You should look carefully at the amount of coverage your company may provide, then buy additional life insurance, either through benefits plans at work, or on your own, to make sure you have the right amount of coverage for your unique needs.7. Life insurance needs change over time
Life insurance needs change over time – new family members, a new job, a move, or even a raise at work can change a lot. Review your protection every year during your benefits enrollment period at work or when you receive your Social Security statement in the mail.8. Term life Insurance is an easy and inexpensive way to get started
Term life insurance offers more coverage for less money. It is an easy and cost-effective way to get protection in the short term. Because this type of insurance runs out at the end of the term, use it to protect needs that you can anticipate—like paying off a mortgage or funding college for your children.On the other hand, permanent life insurance can also be an important part of your lifetime financial plan. It’s flexible, and can help you meet a number of important goals, including protecting your income building equity, providing an additional source of retirement income, and leaving a financial legacy for your loved ones. You can supplement retirement income by taking loans or withdrawals from accumulated cash value (although the policy’s cash value and death benefit are reduced by the amount taken, plus any loan interest charged).
9. The financial strength and reputation of the company you buy it from matters
When choosing a life insurance company, the financial strength and reputation of the company you select is a key consideration to ensure guarantees are kept. Ask around and do some research before you buy. (Publicly-traded life insurance companies are required to report on their financial condition 4 times a year.)10. There is no substitute for good advice
The more you know about life insurance basics, the more control you have over deciding what’s right for you. To get the right answers, some people prefer talking to a trained financial professional, while others favor doing their own research online or in the press. Whatever way works best for you, taking action to protect your family with the right amount of life insurance coverage is an important part of your lifetime financial plan.
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