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If you have dependents, life insurance can be a key part of your financial plan. But with all of the products available today, it’s difficult to choose a policy, let alone know where to start. Only about half of Americans have a life insurance policy, according to the latest available data from the Life Insurance Marketing and Research Association (LIMRA).
Here are three steps you need to take to pick a life insurance policy that works best for your needs.
1. Consider your coverage needs
The first thing you need to know is the timeline for coverage, whether that’s a limited amount of time or for the rest of your life. For instance, if you just want coverage to pay off your mortgage so your family will be able to stay in your home, a term policy that lasts until your mortgage is paid off makes sense. But if you have kids or just want to provide income for your spouse, permanent life insurance — like a whole or universal policy — could be the way to go.
Once you’ve figured out if you want a term or permanent policy, you can look into the coverage amount you require. In general, you want to consider the following:
- Annual income (if you’re using the policy to replace it)
- Existing debts (including things like credit cards, mortgages, and student loans)
- Expected income (like spousal Social Security benefits)
- Inflation (which has averaged 2.5% per year over the last decade, based on Bureau of Labor Statistics data)
- Timeline (how long you want to replace various costs for)
2. Calculate your life insurance budget
Coverage needs are one thing, but depending on your income, you may have to make some adjustments based on how much you can afford to put toward a life policy per month. The worst-case scenario is that you become unable to make your premium payment and that causes your policy to lapse. That’s why it’s vital to get multiple quotes from different insurers to see your options.
For context, the cost of a life policy will depend on many factors, like:
- Your age
- General health
- Gender
- Coverages
Life insurers generally charge more for riskier policyholders. So you might have to adjust your coverage if, for example, you fall into a riskier category by being a smoker or being an older applicant. Or, if you can, making lifestyle changes can help you secure more affordable rates.
The cost can also determine the type of insurance you end up getting. For example, if you need a high amount of coverage, a term life policy is probably a better option for your budget since those premiums tend to be lower than you’d get with a comparable permanent policy. The fact that it would expire after the term is up may not be ideal, but having some sort of protection in place may be more important to you.
3. Understand your add-on requirements
Life insurance policies can be used to simply provide a death benefit — but nowadays, they have so many other potential benefits you can tap, depending on the type of policy you get. For example, permanent policies can build cash value, which can be borrowed against. The absence of certain add-ons may be a dealbreaker. So it’s important to know where you draw that line before getting a policy.
There are additional features that can come with these policies, too:
- Long-term care benefits: You can use these during your lifetime to pay for certain long-term care costs, should you require that type of care. For context, 65-year-olds have a 70% chance of needing long-term care before they die.
- Conversion to permanent coverage: Some term life policies offer the option to convert it to a permanent policy without having to get a medical exam, which can be especially helpful if you’re trying to hedge against potential life changes that are harder to predict.
- Accidental death: This rider would provide additional coverage in the event that the death of the policyholder occurs because of an accident. This can total two to three times the value of the original death benefit.
- Disability income: If you become disabled after the policy waiting period, you’d be able to get disability income while you’re alive to help cover those costs and loss of income.
Add-ons like these can come at an extra cost, or they may be included in the base price. You need to examine the terms of those options as well, and take that into account.
Life insurance can be complex, but ultimately the best life insurance policy for you will provide all of the benefits and coverages you want, at a price you can afford.
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