There are different types of life insurance, which pays named beneficiaries money if the insured person dies. The two most common are term life and whole life. Term life policies last 10 to 30 years, have a set monthly premium that can't increase, and must be rebought or in some cases converted to a whole life policy at the end of the term; whole or permanent life insurance policies are good for as long as the premiums are paid.
Do you need life insurance? Life insurance is not for everyone. Someone who doesn't have financial dependents generally doesn't need a policy. Those with a large financial reserve that can take care of expenses and dependents in the event of their death may also see little value in having a policy. Older people, including those with children who are already financially stable, may consider passing on life insurance as well. But a policy could be worthwhile in case someone develops a debilitating or chronic illness, as treatment can drain savings quickly.
People with a significant other or family members who rely on them will likely want insurance. The focus is sometimes on the breadwinner in the family, but the loss of a stay-at-home partner can leave a family with a significant financial burden, too. Single parents or grandparents who take care of a child should also consider a policy. Even couples without children may want a policy if their lifestyle is dependent on both incomes.
In the end, a life insurance policy is not so much for the insured person (although it can provide peace of mind) as it is for those who depend financially on the insured.
How do you calculate coverage needs? A policy can be relatively cheap; even $500,000 policies can cost less than auto insurance in some cases. There are several expected costs to consider.
- Current Debts. The policy should cover the insured person's current debts, such as a mortgage, car loan, student loans or credit card balances.
- Future Contributions. Consider a married couple with two children. They want a policy that will cover them for the next 30 years while their children grow up. One parent stays at home and the other works full time. The policy should cover the future earnings of the partner who works outside the home (salary plus potential raises, multiplied by 30 years). A second policy should cover the stay-at-home parent and cost to replace that person's contribution (the cost of child care, tutoring services, a housekeeper and so on).
- Large Future Expenses. As parents, the couple may want to help their children pay for college, buy a first car, or leave enough money for the surviving spouse to take an unpaid break from work to grieve. Future expenses should also include the cost of the funeral.
Make things simple by letting an online calculator do the work. Try ones fromSmartAsset, Bankrate and Prudential.
How do you save on premiums? It's important to shop around before buying a policy. Be wary, though, of sharing information with a website that asks only for a name and contact information. Often this input is sold to many agents or brokers, which can result in a flooded inbox and unwanted phone solicitations.