Life is unpredictable and in many aspects uncontrollable. If you are the sole or significant breadwinner of your family and wish your loved-ones to be financially secured in the event of your passing, buying a life insurance policy is one of the most affordable and effective ways to ensure it.
Here are some life insurance basics:
What Is Life Insurance?
Simply put, life insurance is an insurance on the insured’s life. If the insured passes away during the term of the policy, the insurance company pays a set amount of money to his/her beneficiaries. For example, if John bought a $250,000, 25-year term life insurance policy on his life and named his wife and children as the beneficiaries, John’s wife and children will get $250,000 if John dies within 25 years.
How Does It Protect Your Family’s Financial Future?
Life insurance pays a set amount of money to the insured’s beneficiaries in the event of the insured’s passing. Some of the things your beneficiaries might be able do with the money they receive include:
- Replace your income
- Pay off major debts such as home mortgage, car loans, and credit cards
- Fund your children’s education
- Pay for your final medical and funeral expenses
- Pay off any other outstanding debts
While income replacement and debt payoff are the primary reasons why most people buy life insurance, some of the other reasons for buying life insurance include:
- Efficiently transferring your wealth to your beneficiaries
- Creating an inheritance for your beneficiaries
- Effectively making a large charitable contribution
- Creating a disciplined saving habit
- Buying your business partner’s shares
Type and Amount of Life Insurance
There are various types of life insurance, each designed to serve specific needs of the policyholders. The two most common life insurance types are Term Life Insurance and Whole Life Insurance. The type and the amount of life insurance you need, depends on your current personal situation and future financial needs. There are many different rules of thumb that people use to quickly ballpark the amount of life insurance they need. According to one such rule of thumb, it is 10X to 12X of the insured’s annual gross income.
Cost of Life Insurance
Your life insurance rate is calculated primarily based on your life expectancy, the face amount of the policy, and the length of the policy. Life insurance has never been more affordable, making coverage possible for almost any budget. The premiums on term life insurance policy, for instance, have gone down by as much as 40% on an average from 2007 to 2017. For example, a 40-year old healthy man can now buy a $250,000 term life insurance policy for as little as $40/month.
How to Buy a Life Insurance Policy?
Contact a life insurance agent to help you determine the type and the amount of life insurance policy appropriate for your situation. Your agent will explain various policy terms and coverage, and assist you in preparing the insurance application package. As a part of the insurance application, you may be required to provide your blood and urine tests, and fill out a detailed questionnaire regarding your lifestyle, your family health history, your personal health history, etc. Once your application is accepted by the insurance company, your coverage will become effective for the term of the policy. Within each pay period, you must timely pay your insurance premium to keep your life insurance coverage active.