Choosing a life insurance policy can be overwhelming because it forces us to think about something we really don’t want to happen: the effects on our family or loved ones once we die. Then, there are all the options and the added cost. 40% of Americans do not have any form of life insurance despite the fact that in 35% of American households if the primary wage earner died, they would feel the financial impact within one month. Here are the basics you need to know about how to choose a life insurance policy without breaking the bank so you can get the protection you need.

What Is Life Insurance

Life insurance is a contract between an insurance company and yourself in which you agree to pay a premium in return for the insurance company’s commitment to paying a set amount of money to a person(s) of your choice upon your death.

· The money the insurance company agrees to pay is known as the death benefit.

· The person who receives the money is the beneficiary.

7 Reasons to Get Life Insurance

The main reason to get life insurance is to secure a lifestyle or wealth for your family (or a chosen beneficiary) after you die. There are other advantages as well. Here are the most common reasons to get life insurance:

1. To pay for funeral expenses, unpaid medical bills, student debt, or other debts remaining after death so that your family does not need to assume the burden.

2. To leave money behind to your family or spouse so that they can maintain the lifestyle they were accustomed to.

3. To leave an inheritance, donate funds to a charitable cause, provide funds for college, or pay off a mortgage.

4. To build wealth, as can be seen when using life insurance with investment options.

5. To transfer wealth and take advantage of various tax breaks for the beneficiary when receiving the death benefit. Life insurance can provide many tax-free advantages.

6. To pay for estate taxes so your family does not have to use the inheritance to cover these taxes.

7. To secure a mortgage or other debt when the lender requires it

Types of Life Insurance Policies

There are two main categories of life insurance: term life insurance and permanent life insurance.

In the “term life insurance” category, you may choose life insurance for a specified length of time, the “term”. Within the “Permanent life insurance category”, the length of the policy is “for life” (some companies may also offer the plans to age 65). In Permanent life insurance, you have a few options the policy can offer. Here are the different types of life insurance to help you understand the choices:

· Term Life Insurance—Purchased for a specific length of time, usually between 10-30 year terms, with no cash values, and expires at the end of term, unless it is “convertible”. This is the least expensive life insurance option.

· Whole Life Insurance—Has a set premium and is valid as long as you keep paying the premiums; this is part of the “Permanent life insurance”.

· Universal Life Insurance—Also a type of permanent life insurance, offers investment options; premiums may be adjusted over time based on how you decide to manage it. Factors include your investments, cash values, and other options such as borrowing from your life insurance policy.

Tip: People often assume that they need to choose between one type of life insurance policy or another, but consider the option of leveraging both types of insurance in your favor. It may be a better financial option for you to use a combination of two types because your life insurance needs will vary as you age.

Choosing Convertible or Combination Life Insurance Options

Combination life insurance policies give you options to have a payout in circumstances other than just death. It is now becoming more popular for people to choose a life insurance policy that combines with other coverage, such as long term care insurance. In fact, in a recent study by Life Happens and LIMRA, 1 in 5 Americans stated they would be very to extremely likely to buy a combination product.

Convertible life insurance policies allow you to start off with a term life insurance policy and convert it to a whole life policy instead of losing the policy at the end of the term. This may prevent you from having to take a medical exam when you convert to whole life.

Pros and Cons of Life Insurance

What We Like

· Financial security and peace of mind for your family or spouse

· Flexibility to use the funds from life insurance as the beneficiary sees fit

· Fixed premiums so you know what to expect in your budget

· For Permanent Life Insurance—the possibility of building savings through investments (may also allow the option of borrowing money from the life insurance policy later in life if needed)

What We Don’t Like

· For term life, after the term is up if the death benefit is not paid, any premiums paid into the policy are lost

· For whole life with cash values or universal life, investment options do not yield the highest possible returns

· If you do not pay the premium, your policy will be canceled and you may have to take out a new life insurance policy, subject to your current age and a new medical exam

Determining How Much Life Insurance You Need

Since people will buy life insurance for various reasons, how much you need will depend on why you are buying it. If you are looking to secure the financial well-being of your family should you die unexpectedly, then you will need to review various personal factors to help you figure out how much you need.

Here’s an example of the information you will need to figure out a conservative amount of life insurance:

AN EXAMPLE

How much income your family would need per year to replace your lost income? Keep in mind that when you are alive part of your income goes to sustaining your own needs and activities, so if your income was $75,000, but you used a portion for your own consumption, you may want to consider that. Also, if you cover your mortgage in the death benefit, would a portion of your income have gone to that? These factors can reduce the amount of income you need to replace. The answer to income replacement is not always straightforward, so consider this carefully.

· How many years would you need to provide the income for?

· If you have a spouse, would they work after your death? How much income do they make to contribute towards family expenses? How long will they work?

· Do you need to provide funds to be used for education, like college?

· How much debt does the family (or you) have? Do you want to cover this in your life insurance? Are there outstanding loans, medical bills, mortgages?

· What would your family’s expenses be as a result of your death? Consider funeral expenses, costs of hired help at home, etc.

· What investments and savings do you have?

Costs of Life Insurance

Life insurance can be as inexpensive as a few dollars a month to several hundred. Most life insurance companies offer various payment options to help make payments affordable. However, 44% of millennials overestimate the cost of life insurance, which may feed into the growing hesitation to get it.

The cost of life insurance will depend on a few factors such as:

· Age

· Medical conditions or health, including if you are a smoker or not; you may have to pass a life insurance medical exam to be eligible for life insurance

· The amount of the death benefit

· The term of insurance: permanent life insurance is significantly more expensive than term life

· Whether or not the policy has cash values or not

Overall, the younger and healthier you are, the less expensive life insurance is.

Bottom Line

There are a lot of options to choose from when deciding on what kind of life insurance you need. Your age and personal situation will dictate what the most needed life insurance coverage is for you, as well as how much you can afford.

· Consider that Term life insurance can be used for short term needs in combination with Convertible or Permanent life insurance options to save money, especially when you are starting out.

· Always review your life insurance choices every few years or whenever your family situation changes, including the amount of the death benefit and who the beneficiaries are.

· Getting the opinion of licensed life insurance or financial advisors when you are making your choices is strongly recommended because it can help you find ways to afford the right kind of coverage and ensure you don’t end up going without life insurance because you are worried about the costs.

– Mila Araujo the balance