Life insurance is a planning tool that provides financial protection for your dependents
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How does life insurance work?
Life insurance is a planning tool that provides financial protection for your dependents.
The asset provides a tax-free lump sum of money which is paid to your dependent after your death. Typically, life insurance is bought so that your dependents would be able to sustain payments for bills, college tuition or other after-life expenses.
- Basics of life insurance.
- What are the different life insurance policies?.
- What does it cost to buy life insurance?
- Reviews of life insurance companies
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Key components of life insurance policies are:
- • Term: When buying life insurance you would choose how many years your policy will last. This will also depend on the type of life insurance that you purchase — permanent insurance has a term that will last your whole life for example.
- • Death benefit: The face value for the life insurance policy. This is the amount of money that would be paid to the beneficiary if you passed away.
- • Premiums: The monthly or annual payments that you give to the insurer to keep the life insurance policy in place. If you miss a payment or decide not to pay the life insurance policy would be canceled.
How to calculate your life insurance needs
Every individual has a different financial situation and therefore will require different life insurance needs.
When calculating your needs you should consider what the life insurance will be used for and why you may need life insurance in general.
If you are young and do not have any dependents then buying life insurance may not be a necessary purchase at this point in your life. On the other hand, if you are starting a family in which the financial livelihood of the family relies on your salary, then you may want to consider purchasing some life insurance coverage and calculate your future needs.
When beginning to calculate how much life insurance you need, you should start by adding up your current and future financial obligations. This can include obligations such as:
1) Future salaries
2) Mortgage balance
3) Debts
4) College costs
5) Funeral costs
After you have figured out your obligations, you can add up your current assets such as savings and college funds. Finally, by subtracting your current assets from the obligations you will arrive at a target amount for how much life insurance you will need. It is important to note that this is a rough estimate for coverage and it may be useful to purchase slightly more life insurance to compensate for unexpected financial situations that your dependents might face.
Types of life insurance
Life insurance companies will typically offer two different types of life insurance: term life insurance and permanent life insurance..
A term policy will last for a set period of time before expiring while permanent plans stay in effect for your entire life. Furthermore, some permanent life insurance policies will have a cash value component that will grow as you make premium payments.
Depending on your situation and what the purpose of your life insurance is, the type of life insurance that you need will change.
For example, if you are looking for a cheap policy to cover future financial obligations like college tuition, then choosing a term life insurance policy with a death benefit that matches the total tuition may be the best option. On the other hand, say you have Type 1 diabetes and have had problems with getting approved for life insurance. In this case, a permanent policy like guaranteed acceptance life insuranc may be a better option for coverage.