Life Insurance: The Foundation
To achieve your financial destiny takes financial planning. A solid financial plan has to consider good and bad times during a person's life. Buying life insurance is accounting for the potential bad times during a person's life and is the main reason to buy life insurance. Yes, I said those three evil words "buy life insurance." A life policy is the foundation of any solid financial plan.
Basics on Life Insurance
For many people life insurance is looked upon as something they will buy "someday." Most people know they need to have some life coverage, but never take the time to do basic research.
First of all life coverage is meant to be for income replacement if a spouse or parent dies prematurely. If you and your spouse produce some type of income then it needs to be protected. Today most families need income from both spouses regardless of the amount they earn to live their lifestyle needs.
Life coverage comes into play if one spouse dies prematurely and the income is still needed for the family. Most financial experts recommend a person should have about 5 to 10 times their annual salary. This is not a hard and fast rule, but this figure will give you a starting point for the amount of coverage.
Life insurance is not meant to be your retirement plan or your kids' college fund. If your financial advisor sold you a policy to meet these needs you should consider receiving a second opinion.
Types of Life Insurance
For a couple when they are reviewing life policies they will find three common types of life policies: Group Insurance, Cash Value Insurance and Term Insurance.
Group Term Insurance
Group insurance is the easiest to explain. Group term insurance is the common life insurance an employer will offer to employees. The life insurance only covers the employee while they are employed. Typically the coverage is only for 1 or 2 times the employee's annual salary, which does not meet the recommended 5 to 10 times annual salary. This type of insurance is a good bonus insurance and should not be your primary insurance.
Group insurance is going to be your least expensive since the coverage amount is small and there is little or any approval process
Cash Value Insurance
The second type of life insurance goes by several names: Whole Life, Permanent Insurance or Cash Value Insurance. With cash value insurance you have two different coverage amounts. One is the face amount or the actual coverage your beneficiaries would receive. You also have a second amount which is the cash value. The cash value grows over time and your beneficiaries would receive the face amount and cash value depending on the payout method selected.
Whole life has become popular again in the past decade due to the poor returns of the stock market. However, as stated earlier life insurance is not meant to be your retirement account, but income protection. There are much better places to save your money for retirement such as a Roth IRA.
Of the three types of life policies cash value insurance is the most expensive.
Term Life Insurance
The final type of life insurance is Term Insurance. As the name states, your coverage is set for a specific period of time or term. A term period could be for as little as one year up to 30 years or more. At the end of your term you can reassess your life insurance needs to see the amount you at that stage of your life.
A common length of term many families buy is a 20 or 30 year term. A 20 year term should take you past your peak responsibility years, but to be safe a 30 year term should be adequate.
One tip you need be aware of with term insurance would be your options at the end of the term. You want to look in the policy itself for a guaranteed renewable policy without any medical questions. The reason is we never know what our health may be like 20 or 30 years down the road so having a guaranteed renewable policy is vital to your financial plan.
Many of your cheaper term policies require you to re-qualify for your life insurance at the end of the term. This means you have to answer medical questions to continue the coverage.
Term insurance will cost more than group insurance, but is usually 2 to 3 times less as expensive as cash value insurance. However, do not look only at cost as the only factor. You should use the recommended 5 to 10 times your annual salary to come up with a figure to adequately protect your family. Look for amount of coverage you and your spouse need and then at the cost.
What Experts Say
I never like to listen only to financial advisors or insurance agents. I like to see what third parties have to say about topics. When the topic comes to life policies most third party companies or people recommend: Term Insurance. Read financial magazines like Smart Money and Money Magazine or books by Dave Ramsey or Suze Orman or newspapers like The Wall Street Journal or USA Today for a second or third opinion.
These sources have stated at one time or another that term insurance is a better way to protect your family.
Life insurance the foundation of a financial plan and a family is dependent on the income to make the financial plan become a reality. Take away the income then the plan falls apart. Life insurance helps protect the financial plan if either spouse passes prematurely.