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Don’t buy life insurance without reading this.
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Buying life insurance coverage can be confusing, but it’s important for anyone who wants to provide protection for loved ones. An untimely death could cause financial disaster for those left behind, especially if they struggle to pay the mortgage loan on a family home or to cover the costs of caring for surviving children.
For those in the buying process, here are two big questions that must be answered early on to make sure a sufficient amount of protection is included in any life insurance plan that is ultimately purchased.
1. How long should the coverage term be?
For most people, term life insurance is the right type of coverage. Term life insurance means the policy is in effect for a preset amount of time (such as 20 years or 30 years) and the death benefit only pays out if the policyholder dies during that coverage period. Whole life policies are an alternative that remain in effect indefinitely, but most people don’t need coverage forever and so buying a costlier whole life policy isn’t worth it.
Since term life insurance is the best choice, a would-be policyholder must figure out how long their coverage term should be. Making this decision involves thinking about how long loved ones will need protection for. For example, if a policyholder wants to make sure their mortgage is paid off and their kids are protected until adulthood and they have a 2-year-old and 20 years of payments left on their mortgage, they’d likely want a policy that lasts around 25 years to provide time for their kids to go to college and their home to be paid off.
Ultimately, deciding the length of a coverage term should involve considering when loved ones will stop being dependent. When shared debts are paid off, kids are provided for, and there’s enough money in the bank for a surviving spouse or partner to live on without any income from the policyholder, insurance stops being necessary. So think about how long that will take and decide on a coverage term from there.
2. How large should the death benefit be?
The next big question is how large the death benefit should be. The death benefit is paid when a policyholder dies, and it should provide all the money surviving loved ones would need.
To figure out how much that is, the DIME formula is helpful. The policy should be enough to repay debt; replace income for a desired number of years; repay a mortgage; and cover education for the kids. By using this formula, would-be policyholders can get a good estimate for how much money they need their insurance to pay to their families in case of an untimely death.
By answering these two questions, anyone who is buying life insurance can be certain they are getting exactly the protections their surviving loved ones need. They can then shop around among different insurers to get the most affordable policy from a company that has a solid reputation for customer service and timely payment of claims. Once these steps are done, they can rest assured their family won’t face financial devastation should the worst occur.
Our picks for best life insurance companies
Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.
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