Did you know that 40% of people in the US do not have life insurance? And, of those that do have it, 20% say they don’t have enough?
When you think about your family and your income, what would happen if you pass away and your income is lost? Do you have life insurance? Do you have enough to cover your lost income and ensure that your family is financially stable?
There are a lot of misconceptions and misunderstandings about life insurance. Many people don’t fully understand how it works, why they need it, or how much they need. We’re here to help.
Read on for 5 things to know about purchasing life insurance.
1. It’s Cheaper Than You Think
Many people don’t have life insurance because they think it’s too expensive. While your premium could be high if you are older and in poor health, a young person who is a non-smoker could get a term life insurance policy for less than $20 a month. That’s about the equivalent of cutting out one to-go coffee each week.
The best way to find a competitive premium is to shop around. Work with an agent that can get you quotes from a number of different insurance companies or do your own searching online.
2. There Are Different Types
Before you start shopping for life insurance, it’s important to understand the different types and what you need.
Term life insurance is for a specified period of time, like 20 or 30 years (the term). When the term ends, the coverage ends as well. Term life insurance provides level coverage, which means that the value of the policy remains the same throughout the term. This will be your cheaper option since it’s only for a limited period of time.
Whole life insurance is just that: insurance that covers you for your whole life. It is in effect from the day you purchase the policy until you die. You pay a set premium each month and the cash value of your insurance policy builds. Once the policy matures, which is set by the insurance company, you can cash out a portion of the value if you want.
Whole life is the more expensive option, but for good reason. The value increases and it covers you your entire life, not just a for a certain period of time.
A limited pay life policy is another option. This allows you to pay the premiums for a whole life policy over a limited time (such as 10, 20, or 30 years) so you don’t have to pay any premiums during retirement.
3. Use the “DIME” Method to Determine How Much You Need
There are different formulas for figuring out how much insurance you need. You can use a simple formula of 7 to 10 times your annual salary, or a more comprehensive formula, such as the DIME method. The DIME method considers the following:
Debt: this includes your mortgage, student loans, car loans, credit cards, personal loans, and any other outstanding debt
Income: how long do you want to replace your income for (consider your spouse and their income and your children and their ages
Mortality: consider the cost of your funeral and carrying out any of your wishes associated with burial, cremation, etc.
Education: if you want to pay for college or other educational expenses for your children, factor that in
This amount might be a more realistic estimate than just focusing on your salary, as it takes into account future expenses as well as funeral costs.
Will You Be Purchasing Life Insurance Soon?
Don’t let purchasing life insurance be something that you continue to put off, year after year. If you wait too long, it will be more expensive and you might miss out on your window to get a policy at an affordable rate.
If you found these tips useful, be sure to check back often for new content.