Selecting a life insurance policy can be a very difficult decision as you may not know how much coverage you need and what you should be paying for life insurance. Life insurance is a wise investment decision that you can make for your loved ones in order to provide them with financial assistance in the event of your death. Since they may depend on your income, your death can leave them in financial distress. If you do not want a large policy you should at least consider enough coverage to pay for a funeral as they can cost upwards of $10,000.
How Much Life Insurance Do I Need?
Determining how much life insurance coverage you need depends on your income and your financial situation. It is hard to say an exact figure as everyone has different financial needs. Some of the things to consider include the following:
- Income
- How many dependents you have
- Debts
- Lifestyle
Most financial experts recommend that you plan on taking out a life insurance policy that is between 5 and 10 times your annual salary. This will cover the mortgage, funeral expenses, and will set aside money for your dependents to survive for a few years.
Which Life Insurance Policy Is Right for Me?
If you have made the decision to purchase life insurance your next decision will come down to finding out which life insurance policy you need to acquire. There are 3 types of life insurance coverage to consider:
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
Each policy offers different coverage limitations and restrictions. Understanding your financial situation will help you to select the correct life insurance policy for your family.
Whole Life Insurance
With a whole life insurance policy you have the same premiums over the entire policy however you cannot add to the amount of coverage you signed up for and you have no control over how the cash reserves are invested. Whole life insurance policies tend to be the most expensive and not always beneficial to the dependents as there may be stipulations on how they receive the money.
Variable Life Insurance
Variable life insurance is a little more flexible as it allows you to change the policy. You will build up a cash reserve that can be invested in several different things and you will not need to pay taxes until you surrender the policy. The interest you earn on the investments can be applied toward your premiums, reducing the amount of money you need to pay. The downside is that poor fund performance can decrease the amount of money that is left for your beneficiaries.
Universal Life Insurance
Universal life insurance offers the most flexibility but you will pay more for it. You can use part of your accumulated earnings to cover the premiums and you are able to adjust the death benefits as needed. Families that deal with fluctuations in their pay may find universal life insurance plans to offer the greatest benefit. However keeping the premiums at the minimum can cause the policy to lapse and this leaves you vulnerable. The interest return can also do poorly based on the management of the investments, which could cause you to pay higher premiums later.