Last Updated: November 16th, 2023
Understanding the Need for Life Insurance
Life insurance is a cornerstone of financial planning, yet it often goes undiscussed due to its association with dying. However, knowing how to choose life insurance is a pivotal decision that can offer peace of mind and financial stability for those you leave behind. If your life insurance knowledge is lacking or you are just now exploring your options, we can help.
Evaluating Your Life Insurance Needs
When contemplating how to choose life insurance, first recognize its role for your beneficiaries. Life insurance is not for you but for those you care about. It covers final expenses, pays off debts, and replaces your income for your family’s living expenses. A genuine need for life insurance is almost always present, whether for personal debts or future estate taxes that could burden your family.
How Much Life Insurance is Sufficient?
The amount of life insurance you choose is deeply personal. While the ten-times-income rule is a standard benchmark, it’s just a starting point. Typically, the amount of coverage should take into account your debts, your income, and providing for your dependents should you die before your time. A modest policy may suffice for single individuals, whereas families or business owners may require a more substantial safety net.
Once you’ve established the need for life insurance, the next most important consideration is how much. Unfortunately, there’s no easy answer to this question. It will depend on personal circumstances, including your financial obligations.
Let’s look at some common scenarios:
Single Person with No Dependents and Minimal Debt
If this describes your profile, you may need sufficient life insurance to cover reasonable burial expenses and any debts you might have that you own with someone else. Other than that, you may only want to have enough insurance to enable your loved ones to better cope with your death. A smaller policy of $50,000 or $100,000 may be sufficient.
Married, Self-Supporting Spouse, No Dependents, and Significant Debt
True, your spouse may not need life insurance proceeds to provide for their support. But at a minimum, you want to provide for final expenses, adjustment money, and certainly enough proceeds to pay off any debt you have. For example, say you and your spouse own a home with a mortgage. You’ll want to be sure your life insurance is sufficient to pay it off. So your spouse can stay in the home comfortably after your passing.
Married, Non-Working Spouse, Two Dependents, and Significant Debt
This type of profile will generally require the largest amount of life insurance. You will need to cover final expenses, income replacement, and personal and family debt payoff. This is where the 10-times-your-income rule of thumb comes into play. You’ll certainly want to start with a lot of life insurance if your children are young and need to be provided for over many years. You may be able to adjust that downward if your children are approaching adulthood, especially if your spouse is planning to reenter the workforce.
Business Owners, with a Significant Amount of Business Debt
Many self-employed people don’t consider this a life insurance-related obligation.But if you own a business with substantial debt, you may want to ensure that your life insurance policy will provide funds to pay off those debts upon death. After all, once you’re gone, you won’t be there to help cover the obligations. By having sufficient life insurance to pay off any business debts, you can be confident you are leaving your business partners or family members a debt-free business upon your death. Suppose it is for the benefit of business partners. In that case, it will make it easier for them to continue the business without your contribution to the business.
If it’s for family members, paying off business debts will make it easier for your loved ones to sell the business once you’re gone. It’s common for business owners to maintain one or more life insurance policies to pay off business-related debt. In that case, the amount of life insurance you’ll need in that policy should roughly match the amount of debt the business owes.
What is the Best Type of Life Insurance?
The most basic types of life insurance are term life, universal life, and whole life. Here is a quick look at all three.
Term Life Insurance
Term life insurance is a policy that provides a death benefit with no cash accumulation feature. That’s a major reason why it is so much less expensive than whole life insurance. And for that reason, you can afford to purchase a much larger policy. The disadvantage of term life insurance is the time limit. A typical term life insurance policy will run between five and 30 years. At the end of the term, you will generally be given the option to renew the policy at a much higher rate.
Universal Life Insurance
Universal life insurance is a permanent policy that offers death benefit protection and cash value accumulation. One of the more distinguishing features is the flexibility of premiums and death benefit.
Whole Life Insurance
Whole life is permanent life insurance. This is because it cannot be canceled except for nonpayment of the premiums. It features a fixed premium and death benefit. And also provides a cash accumulation feature that adds something of an investment provision to the policy. The disadvantage of whole life, however, is that it’s much more expensive than term. In fact, the premium for a whole life insurance policy will typically be several times that of an equivalent amount of term life insurance.
Selecting the Right Type of Life Insurance
When mastering how to choose life insurance, understanding policy types is crucial. Below is a comparison chart that outlines the key features of Term Life, Universal Life, and Whole Life insurance policies to aid in your decision-making process:
|Feature||Term Life Insurance||Universal Life Insurance||Whole Life Insurance|
|Coverage Duration||Temporary (e.g., 10, 20, 30 years)||Flexible, Permanent||Permanent|
|Premium Cost||Lowest cost||Moderate cost||Higher cost|
|Cash Value||No||Yes||Yes, with guaranteed growth|
|Investment Options||No||Yes, with various investment options||None|
|Flexibility in Premiums||No||Yes||No|
|Potential for Growth||No||Yes, based on market performance||Yes, but at a guaranteed minimum rate|
|Suitable for Estate Planning||Less suitable||Very Suitable||Very suitable|
Ready to find out which life insurance is right for you? Use the life insurance calculator available on this page to see the prices you will pay for different amounts and lengths of life insurance coverage. Enter your date of birth and the amount you want an estimate for to get an instant quote and take the first step toward securing your family’s future
The Optimal Timing for Purchasing Life Insurance
The prime time to choose life insurance is invariably “now.” Youth and health work in your favor, securing lower premiums. Waiting will mean higher costs and the possibility of becoming uninsurable. Employer-provided life insurance is a valuable benefit, but it’s often insufficient and only available while you are working for that employer – another reason to lock in an individual policy.
Choosing the Best Life Insurance for Your Needs
Choosing life insurance can be straightforward with the proper knowledge. Understanding your needs will help in which policy you choose and how much life insurance you need. Using our life insurance calculator on this page, you can compare multiple quotes from top life insurance companies. We are here to help you navigate the process. We are independent brokers and can help with any of the top life insurance companies.
Choosing the best life insurance policy is easy when you know what is available and how the policies work.