Life insurance is a critical element to consider as you assess your financial plan. Generally, if someone depends on you financially and would be negatively impacted by your death, getting a life insurance policy can be a smart move. But life insurance isn’t for everyone. If you’re on the fence about purchasing a life insurance policy, here are several questions to ask.
What is the Purpose of the Life Insurance Policy?
Before you explore policy options, it’s smart to define why you want a policy in the first place. Some common reasons people get life insurance are to:
- Cover debt someone has with a co-signer, like a mortgage or student loans
- Replace income to support your spouse, children, or parents
- Pay for final expenses like burial and estate taxes
- Leave a legacy inheritance for heirs or a charitable organization
- Create another savings vehicle (if using permanent life insurance)
Clearly defining the purpose of a life insurance policy makes it far easier to compare options and find the right one.
What Type of Life Insurance Do You Need?
There are two main types of life insurance to consider when trying to find a life insurance policy:
1) Term life insurance: A term policy provides a death benefit payout to beneficiaries if the policyholder dies while the policy is in force. Terms generally range from 10 to 30 years and may be renewed once they expire, although premiums will often go up with renewals. Term life insurance tends to be best for those who want to cover expenses for a set period, such as during the years kids are at home or until a mortgage is paid.
2) Permanent life insurance: A permanent life insurance policy, which includes whole and universal life, offers a similar death benefit to a term life insurance policy, but with a guaranteed payout. Permanent policies last a lifetime and additionally provide the ability to accrue cash value that can grow through investment returns and dividends. The cash value may be used during the policyholder’s lifetime for any number of expenses or to increase the policy’s death benefit payout down the line. Permanent life insurance can be a useful tool for those with a high net worth who are interested in the full potential of a life insurance policy or someone who wants to be sure their loved ones will receive a death benefit payout regardless of at what age they pass.
Who Will Benefit?
Beneficiaries are the people you choose to receive the death benefit payout from life insurance if something happens to you. Deciding who may benefit from a policy can be an effective way to determine if you need one. Even without dependents, if there’s a charitable cause you want to give to when you pass away, or children who will need to be fed after you’re gone, purchasing a life insurance policy could make sense.
The Bottom Line
Deciding whether or not to purchase life insurance is a decision that can be made easier by working alongside a financial professional. These individuals can help you understand the benefits of a policy, like supporting loved ones, providing peace of mind, and in certain instances, offering another useful financial tool.