Insurance is a piece of mind product. A good insurance policy assures you that your loved ones won't suffer financially should anything happen to you.
A lot of considerations are necessary to make sure you're leaving your dependents in solid financial shape.
Should you get whole or term insurance? What's the best term insurance policy? How long of a term should you get and for how much?
Read on, as we're covering everything you need to know to choose the best policy for your needs.
Select Term Insurance, Not Whole
The main reason to choose term insurance over whole is that it is less expensive. Unlike whole insurance, there is no investment component, reducing your costs significantly.
With term insurance, you're getting strictly what you need; coverage for your loved ones in case you are not able to be there to help provide for them.
Keep your investments separate from life insurance. If you really want to invest, take the amount you'll save from choosing term insurance and put that in your brokerage account.
Be Truthful During the Application Process
Many people make the mistake of lying or withholding information during the application process.
People think they can get lower premiums or improve the likelihood of approval by not revealing their entire health picture, but being less than truthful can have devastating consequences. If the insurance company spots a lie or misrepresentation, they will either charge you a higher rate or deny your life insurance coverage.
The situation gets much worse if you lie or misrepresent information on your application and you die. In those instances, your insurer could reduce your payout or even deny the benefit payment to your heirs altogether.
That runs counter for the reason of getting insurance in the first place, which is to take care of your loved ones.
Be honest and above board knowing your heirs will be comfortable once you're no longer able to be there for them.
Make Sure You Get Medically Tested
Don't be fooled by insurance ads that say "no medical exam required."
Not getting medically tested often leads to a rejection of claims. After a policyholder has passed away, it is not uncommon for the insurer to deny a claim because of health conditions they say were not revealed during the application process.
The answer is to have a medical record of your health condition so your heirs can prove the status of your health should there ever be a problem. Be honest and forthcoming on your application and during the medical testing so you can rest assured your beneficiaries will be taken care of.
Determine How Long of a Term You Need
Term insurance policies are sold for terms of 5, 10, 15, 20, 25 or 30 years. The longer the term of your policy, the higher your insurance will cost. This is because you're locking in your rate for a longer period of time.
Insurers know the older you get the more likely you are to experience health problems or even pass away.
Your insurance term should be long enough to cover all of your financial obligations. Round up your term if your longest obligation falls between term lengths. For example, if you owe on your mortgage for another 13 years, round up and select a 15-year term policy. Covering the mortgage is one of the biggest reasons people get life insurance.
Another factor you must consider is to know how long you have until your children are on their own. You'll need to consider their expenses while they are at home, such as food, clothing, education, activities, and so on. Plan on paying for your children into their early 20s, especially if you intend on paying for their college education.
Know Your Why
Getting the right term for your insurance boils down to your reasons for wanting life insurance in the first place.
Is it to cover your bills until your spouse retires? Is it to make sure your children have their needs met until they are old enough to care for themselves?
Whatever the reason, you have to determine at what point in time will your reason for getting insurance no longer be relevant. Is it when you retire? Perhaps it's when you're kids move out on their own?
Knowing when you will no longer require life insurance is the best indicator of how long a term you need.
Select Insurance Options Based on Needs
It's particularly helpful to only consider your specific needs when selecting life insurance options.
The main needs to consider are:
Stage of Life for You and Your Dependants
How many more years will it be until you or your spouse retire and can pay your financial obligations? How long must you provide for others?
The answers to these questions are very individual. In other words, don't be influenced by the quotes your friends have received as their situations may be different than yours.
Life insurance needs are different for a single person with no children than they are for someone who is married or who have children. Plan accordingly and only get the amount of insurance you and your dependents need.
How Much of a Claim Will Your Family Require?
Factor in how much money your family will require to meet your expenses. It's best to determine the cost of your current lifestyle.
Add in inflation, which rises at a rate of 3.22% each year, to make sure your payout lasts as long as possible.
How Much to Pay off Debts
Don't burden your loved ones with home, car loans or credit card debt. Lenders still come calling for their money long after we are gone. Make sure those you care about don't have to deal with lenders and collectors and cover your debts.
Consult a Fee-Only Advisor
Up until this point, we've been making loose calculations on how much insurance you'll need. Someone with a complex financial picture or who is in a lot of debt may require a deeper look.
A fee-only advisor will go through your finances with a fine tooth comb and, unlike commission-based advisors, they won't try to sell you products you don't need. A fee-only advisor can focus solely on helping you get the coverage you and your family truly need.
Consider More Than Just the Price
Getting a favorable premium for your term life insurance is important. Just as important is the financial stability of the insurer you choose. You want to make sure you're partnering with a company that will be there when you need it.
The Street provides an excellent and free way to look at the financial strength ratings of nearly all insurance companies. Just enter the stock ticker for any companies you're considering, and their tool will show you ratings based on a letter grade.
The best insurance companies are the strongest financially. To narrow down your list of insurance companies to sign with, consider both price and the financial health of potential insurers.
Reduce Risk by Diversifying
We've been considering your options should something happen to you. But, what should you do if something happens to your insurance company?
Many insurers go out of business or sell your policies to other insurers. When that happens, you don't want to be left holding the bag.
You have some protection to start with. Each state has a guaranty association which insurance companies are required to join. These associations guarantee that your insurer doesn't just sell your policy and disappear.
Your policy is at least partially guaranteed. In other words, your loan is guaranteed up to a certain amount if your insurance company disappears or sells your policy.
Every state varies in terms of how much of your policy they will guarantee. Contact your states life insurance guaranty association to find out the monetary limit of their protection.
If the amount of their protection is less than the amount of insurance you're seeking, split up your insurance. Buy two different policies from two different companies. In doing so, you're ensuring that your coverage will be fully guaranteed by two different companies instead of partially guaranteed by one company.
Choosing the Best Term Insurance Policy
It's never too late to choose the best term insurance policy for you. Obviously, the earlier you get insured the cheaper the insurance payments will be. This is primarily due to the fact it is less likely you will die during the term of your loan compared to an older person.
Consider all the factors, including the appropriate term and how much of a payout will help your beneficiaries the most.
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