Shopping for life insurance is seldom very high on most people’s “to do” lists. Still, when it comes to protecting themselves and their families, it is important. So how do you determine how much – and what kind – of life insurance is right for you?
You may want to consider the following four steps:
Step number one
Assess your immediate needs. Before you can decide how much life insurance to buy, you have to determine precisely which needs you are hoping to meet. For example: Will you use the policy’s death benefit to pay for funeral expenses only? Or are you hoping to provide funds to help your family cover ongoing monthly expenses such as housing, car payments, and food? What about a side fund – do you want to have money set aside to meet emergencies or opportunities? Your answers to these questions will help you determine how much coverage you need.
Step number two
Consider your future needs. Will you use your policy as part of your overall financial plan? Some policies allow you to accumulate money on a tax-deferred basis* to meet unexpected emergencies, help pay college expenses, or supplement retirement income. Once you’ve determined both your immediate and longer-term objectives, you should have a fairly good idea of how much insurance is right for you.
Step number three
Determine how much you can afford to pay. Regardless of how much coverage you need, it makes no sense to buy a policy you cannot afford. Once you know how much you can set aside – comfortably – each month, find a policy that fits your budget. “Term” insurance, for example, provides the largest amount of coverage for the lowest monthly cost, but it doesn’t build cash values. What’s more, coverage ceases (or becomes much more expensive) at the end of the “term period” – regardless of whether you still need the protection. Permanent insurance, on the other hand, costs a little more, but it builds cash value** which you can access to meet planned or unplanned financial needs. (Keep in mind, however, that policy loans will reduce the death benefit and cash values.)
Step number four
When you’ve determined how much insurance is enough, how much you can afford and what kind of policy to buy, you want to find a reputable agent who represents a high-quality company. And remember – while it may not be high on your “to do” list, your family – and your future financial security – could depend on it.
* As long as premiums are paid and the policy doesn’t lapse. Assumes contract is not a modified endowment contract under IRC §7702A.
** Accessing cash values may result in surrender fees and charges, may require additional premium payment to maintain coverage, and will reduce the death benefit and policy values.