Deciding whether you need life insurance can be a complicated process. The decision can be even harder when you are younger. This article highlights some of the issues that you should think about. We hope that this will help you to make an educated decision. (For related reading, see How Much Life Insurance Should You Carry?)
SEE: Intro To Insurance
Providing for Your Dependents If You Die
Let's start with the most obvious reason for why someone should invest in life insurance ... the fact that it can replace your income if you die before your dependents. You may want your children to go to college and your family to enjoy a certain kind of lifestyle. Likely, you still want this to happen even if you die prematurely. But, if you are the primary bread winner for your family, they may not be able to afford it if you die and do not have enough savings to cover their expenses. You can address those concerns by buying enough life insurance.
You Have Options
You have the option of buying a term life insurance policy, which would cover you for a set number of years, generally ranging from 10 to 30 years. These policies pay a benefit only during the term period that the insurance covers. These can be a good option if you want coverage for a set period, say, until the children finish college.
You also have the option of buying a whole life policy, also known as permanent life insurance. There are several types and sub categories of each type, and they usually pay a benefit to your beneficiaries when you die.
The amounts the premiums will be will depend on the policy you purchase.
Insurance May Be a Good Investment
Many young professionals are looking for investment options for their savings. For these individuals, a variable life insurance policy can provide a good addition to their investment portfolio, as it allows investments in stocks, bonds and mutual funds. These investments can allow your cash value to increase more quickly, though there are some investment risks. When choosing a policy with an investment feature, you can limit your risks by choosing one with a guaranteed minimum death benefit. (To learn more, read Variable Vs. Variable Universal Life Insurance.)
You Can Sell Your Policy
If you become terminally ill and are in need of cash to cover medical and other expenses, you may have the option of selling your policy to a viatical settlement company at a discounted price. In exchange, the settlement company would make the premium payments and in turn collect the amount of the face value upon your death. While the amount you would receive in this case is less than the amount your beneficiaries would receive, if you continued premium payments and they inherited the amount, the lump-sum cash payment can come quite in handy if you have no other cash resource.
You Can Accumulate Cash
With insurance, you also have the possibility of allocating a portion of your premiums to a cash accumulation vehicle, an option usually available under universal life insurance policies. This accumulated amount can serve as a cash reserve, and can be used to pay insurance premiums if your disposable income is no longer sufficient to pay those premiums. However, you will need to ensure that the available cash is sufficient to prevent the policy being lapsed due to unavailability of cash.
How Much Do You Need?
The amount of insurance that you need depends on what you want it to cover. Look at how much you earn, and how many years your family will need to replace that income if you die prematurely versus how much you have already saved. Also look at what items that you want to make sure would be paid for, such as college tuition for your children.
The Bottom Line
Life insurance is not for everyone. But, you should not dismiss it without doing some research. If you have others who depend on you financially, it is very likely that you need it. Your financial advisor can help you to decide which type of policy is best for you. Buying life insurance can be one of the best financial steps that you take for you and your family. (For more information, see What To Expect When Applying For Life Insurance.)