Life Insurance: How Much Do I Need?

Contents

• Introduction: What Is Life Insurance?
• Understanding Your Financial Needs
• Factors to Consider When Determining Coverage
• Different Types of Life Insurance Policies
• Assessing Your Life Insurance Needs
• Determining the Right Coverage Amount
• Selecting a Reliable Life Insurance Provider
• Tips for Purchasing Life Insurance
• Reviewing and Updating Your Life Insurance Coverage
• Find the Right Coverage

Introduction: What Is Life Insurance?

In 2022, CNBC reported that67% of Americanshave no estate plan. If you’re one of them, now is the time to start thinking about how to protect your loved ones. Most people don’t like to think about dying, but careful planning now can save your family members and friends a lot of heartache in the future.

If you have children, a spouse or anyone else who relies on your income, your estate plan should include some type of life insurance. This is an insurance product thatpays money when you dieor after you’ve paid the premiums for a set amount of time. Your heirs can use the money to replace your lost income, ensuring they have enough funds to pay for housing, utilities, transportation and other necessities.

Final Expenses

Depending on your financial situation, your heirs may need the proceeds from a life insurance policy to cover your funeral expenses or pay estate taxes. Thinking about life insurance now ensures that your beneficiaries won’t have to make sacrifices on your behalf after your death. With careful planning, you can create a legacy that benefits family members, friends or your favorite charitable causes.

It’s clear that life insurance is important, but how much coverage do you need? It depends on how much you earn, how much money you have invested and how many beneficiaries you have. Generally, the more you earn, the more coverage you need. You may also need extra coverage if you live in a large house, have a child with support needs or have several family members who rely on your income to cover their basic living expenses.

Financial Needs

Buying life insurance starts with understanding your financial needs, reviewing your current income, assessing your future earning potential and learning about the three main types of life insurance policies. Once you determine what type of policy you need, you can assess your life insurance needs, choose the right amount of coverage and select a reputable insurance provider.

After creating an estate plan, you should update it periodically to ensure it matches your family’s changing needs. This includes reviewing your life insurance policy and determining if you need additional coverage. If you don’t have an estate plan in place, start exploring your life insurance options and secure the right amount of coverage as quickly as possible.

Understanding Your Financial Needs

No two people have exactly the same financial situation, so you shouldn’t buy a policy just because someone recommended it or because you received an advertisement from the insurance company. Before you buy a policy, take a close look at your financial needs. Once you understand your current obligations and future goals, you can start shopping for coverage.

Current Financial Obligations

The first step is to examine your current financial situation. If you pass away, your family will need enough money to cover these obligations for at least a few months.

Mortgage or Rent

In May 2023, theNational Association of REALTORS®reported that the average monthly mortgage payment in the United States exceeds $2,300. Assuming your monthly payment is $2,500, your family would need $30,000 just to cover the mortgage for one year following your death.

The median rent isn’t much lower, reachingmore than $2,000 per monthin 2022. Your rent may be even higher if you live in New York City, Seattle, San Francisco or another city with a high cost of living. If you pay $2,000 per month, your family will need at least $24,000 to cover the rent for one year.

If you own a home, don’t forget about the cost of property taxes, homeowners insurance, maintenance and repairs. These expenses may add several thousand dollars to the minimum amount needed for your family to stay in your current home instead of having to move out while they’re grieving.

Outstanding Debts

As of May 2023, the average American hasmore than $90,000in debt. Members of Generation X, who wereborn between 1965 and 1980, have the largest average debt balance, followed by baby boomers and then millennials. If you have any outstanding debts, don’t forget to include them in your financial planning.

Before shopping for a policy, list every debt you have, along with the account balance, interest rate and minimum monthly payment. Not only will you have a clear picture of what you owe, but you’ll be able to share the information with your family members, making it easier for them to manage your estate after you pass away.

Depending on your circumstances, you may have these types of debts:

• Federal student loan
• Private student loan
• Auto loan
• Credit cards
• Mortgage
• Home equity loan
• Home equity line of credit (HELOC)
• Personal loan
• Unpaid medical bills
• Back taxes (state or federal)
• Payday loan
• Unpaid utility bills
• Past-due rent

Daily Living Expenses

Now it’s time to examine your daily living expenses. Ideally, your family members will be able to use the proceeds from your life insurance policy to maintain their current lifestyle. It’s difficult to focus on budgeting while you’re grieving, so add up your expenses and make sure your death benefit is high enough to cover each one for at least several months.

Depending on your family situation and personal habits, you may have the following expenses:

• Childcare
• Prescription medications
• Tuition
• Utilities
• Clothing
• Health and beauty items
• Health insurance
• Homeowners or renters insurance
• Auto insurance
• Groceries

These are the most basic living expenses, but many people have other expenses related to entertainment and personal care. Don’t forget to include these expenses in the planning process:

• Streaming services
• Newspaper and magazine subscriptions
• Jewelry and accessories
• Tickets to movies, plays and concerts
• Restaurant meals

Your family members may be able to cut back on some expenses after your death, but the goal is to purchase enough life insurance so they aren’t forced to make cuts.

Future Financial Goals

Once you have a clear picture of your present situation, you must consider your family’s financial goals. You need to account for these goals when determining the right coverage amount and choosing a life insurance company.

Education Expenses

If you have minor children, you may want to purchase enough coverage to pay for college tuition, room and board, and other related expenses. Some people prefer to send their children to private schools instead of public schools. If you’re one of them, you’ll need a policy with a death benefit high enough to cover up to 13 years of schooling (K through 12). You should purchase additional coverage if you have a child who’s interested in completing law school, medical school or some other type of graduate education program.

Children aren’t the only ones with educational goals. If your spouse has always wanted to return to school for a master’s degree, for example, you may want to purchase enough life insurance to pay their tuition and other expenses. While enrolled in school, your spouse may have to reduce the hours they work each week, so be sure to account for their loss of income when you purchase a life insurance policy.

Retirement Planning

Retirement planning is another important consideration when you’re shopping for life insurance. If you’re in your early 20s and don’t have much — or anything — saved for retirement yet, you may need a much higher death benefit than someone who’s in their 60s and has been saving for 30 or 40 years.

According to the Insurance Information Institute, your surviving spouse would needat least $2,000 per monthto replace your retirement contributions and health insurance. Of course, the exact amount needed depends on your current financial situation. If you only put aside $50 per paycheck for retirement, you won’t need to replace as much money as someone who puts away $1,000 every month, for example.

As you assess your retirement needs, don’t forget to add up the money you already have in your retirement accounts. Individual Retirement Arrangements (IRAs), 401(k) accounts and pension plans can all reduce the amount of life insurance you need to replace your retirement contributions or the income you’ve been receiving in retirement.

Legacy Planning

Legacy planning is the process of determininghow you want your assets distributedafter you pass away. It’s also known as estate planning. Before buying a life insurance policy, consider how much money you want to leave to your beneficiaries.

If you just want to make a small gift to each person, you may not need a policy with a high death benefit. To leave a beneficiary with enough money to pay for tuition, buy a house or cover other major expenses, however, you’ll need a much larger policy.

Money isn’t the only asset that you can leave to your heirs. Vehicles, fine art and precious metals are just a few examples of tangible assets that may pass from generation to generation. If you want to give these assets to one of your beneficiaries, it’s wise to purchase extra life insurance coverage. That way, your heirs won’t have to sell items with sentimental value if they need cash to pay for unexpected expenses.

Factors to Consider When Determining Coverage

One of the easiest ways to determine how much life insurance you need is tomultiply your annual salary by 10. Although simple, this method doesn’t account for every aspect of your financial situation. Therefore, you must consider several factors when determining your desired amount of coverage.

Age and Health

Your age is one of the most important considerations, as it greatly impacts your living situation. For example, many people in their early 30s have young children. If you have kids, you’ll need to get enough coverage to provide for them in the event of your untimely death. If you’re already retired, however, you may not need as much coverage.

Age also affects your financial circumstances. As a 30-year-old, you may have an auto loan, a monthly student loan payment or a mortgage balance of several hundred thousand dollars. You’ll need more coverage than a retiree with a paid-off house and plenty of savings.

You also need to think about your health. As you age, you’re more likely to develop diabetes, chronic obstructive pulmonary disease and other health problems. In fact,95% of all older adultshave at least one chronic health condition — and 80% have two or more chronic conditions.

Your health affects many aspects of your life, such as what type of work you do and how many hours you work each week. If you have a serious health condition, you may have to leave your full-time job and start doing part-time work, for example. As you get older, you may also need to stop doing physical labor and start working in an office, affecting your income.

Chronic health problems also have the potential to increase your medical expenses. The American Action Forum reports that the average person with a chronic illness hasmore than $6,000 in direct healthcare costsper year. These costs come from emergency room visits, hospitalizations and prescription medications. When shopping for life insurance, you need to account for these costs when determining how much coverage you need.

Income and Earning Potential

Your current income and future earning potential are also important considerations. If you earn $100,000 per year, you’ll need a lot more coverage than someone earning $30,000 per year. You may also need extra coverage if your future earning potential is much higher than your current earnings. For example, a resident physician may only earn$60,000 per year during their training, but they have the potential to make $200,000 per year or more when they accept their first attending job.

Number of Dependents

The more dependents you have, the more life insurance you need, especially if you have young children who will need money to attend college. According to the National Center for Education Statistics, annual tuition and fees for private, 4-year universitiesaveraged $37,600in 2021. If you have more than one child, you may need double or triple this amount.

You also need to think carefully about providing for dependents with support needs. Even if your dependent qualifies for Medicaid or other government benefits, your family may have significant out-of-pocket costs for their care. For example, you may need to hire a home health aide or pay for prescriptions that their health insurance doesn’t cover.

If you pass away, your family will need even more money to pay for these needs, as they’ll no longer have access to your income. Before you purchase a life insurance policy, review your records to determine how much you’re spending each year on medical expenses, personal care and other related costs. This can help you choose just the right amount of coverage.

Existing Insurance Policies

The amount of coverage you need also depends on your overall insurance situation. If you have health, life, auto, home and disability insurance, you may not need as much coverage as someone relying on their life insurance payout to cover every expense.

For example, if you have homeowners insurance, your spouse can use that policy to pay for a new roof after a severe storm. They won’t need to use the proceeds from your life insurance to cover this large expense, so you may not need a large death benefit.

Conversely, if you don’t have comprehensive insurance coverage, your family may need your life insurance to pay for damaged vehicles, make critical home repairs and pay for medical services that aren’t covered by health insurance.

Different Types of Life Insurance Policies

Life insurance is a general term that refers to several types of policies. The right policy for you depends on several factors, such as how much you can afford to pay in premiums and whether you want to use your life insurance as an investment.

Term Life Insurance

Term life insurance only covers you for acertain amount of time. This is known as the policy term. If you pass away during the term, your insurance company pays a lump sum to your beneficiaries. Most insurance companies offer terms ranging from 5 years to 30 years, giving you extra flexibility as you plan for the future.

Because term life only covers you for a limited time, it’s not the right choice for everyone. You may want to purchase term coverage if you have a large mortgage balance or if your child is in college and will need the proceeds of your life insurance policy to cover their education expenses if you pass away before they graduate. Otherwise, you may be better off with whole life or universal life.

Features of Term Life

If you’re interested in term life insurance, you should know about two key features. The first one is renewability. Many insurance companies allow you to renew your policy at the end of your original term, extending your coverage. This is a great option if your needs change before the first term ends.

For example, if you develop a life-limiting chronic illness, you may want torenew your policyto give your family extra peace of mind. One of the advantages of this feature is that you won’t have to undergo another medical exam as long as you renew when you’re given the opportunity. This is especially helpful if you have diabetes, heart disease or another chronic health condition, as serious health issues can prevent you from getting a new policy later.

The second key feature is convertibility, which allows you toconvert your term life insurancepolicy into a permanent life insurance policy. If you decide to convert your policy, you can do so without answering medical questions or undergoing a medical exam. Just be aware that your premiums will increase if you make the conversion.

Advantages of Term Life

One of the main advantages of term life is that it costs less than other types of life insurance. The lower cost is due to the lower level of risk. The insurance company only covers you for a limited term, so they’re taking less risk than they would be if you had permanent life insurance.

In most cases, your premium also stays the same for the life of the policy. You won’t have to worry about your costs increasing, ensuring that you have the amount of coverage you need without making it difficult to afford basic necessities. Your insurance company may offer monthly, quarterly or annual payment options, making it even easier to afford your policy.

Term life is also extremely flexible. If you have short-term needs, you can choose a 5-year term, limiting the total cost of your coverage. You can also choose a longer term to ensure that your heirs have enough money to pay off a large mortgage or cover your end-of-life expenses.

Finally, term life insurance is easy to understand. As long as you pay your premiums on time, your insurance company will cover you for the full term. You don’t have to worry about interest rates, investments or other complex issues.

Whole Life Insurance

Whole life is a type of permanent life insurance, which means itprotects you for the rest of your lifeas long as you pay the premiums. Therefore, it provides more coverage than a term life policy. If you let the policy lapse, any residual benefit may be less than what you’ve already paid in premiums. Depending on what type of policy you have and when you let it lapse, your heirs may receive no death benefit at all, so it’s important to stay current on your premium payments.

Features of Whole Life

A whole life insurance policy has three main features. First, it comes with a level premium, or a premium that doesn’t change. You’ll pay the same amount every month, quarter or year, making it easier to manage your finances.

The second feature of a whole life policy is a guaranteed death benefit. As long as you pay your premiums, your death benefit won’t decrease just because you’re getting older. Finally, a whole life policy has a cash value feature that allows you to earn interest.

Advantages of Whole Life

Whole life insurance has several benefits for policyholders. Because your coverage lasts for as long as you pay your premiums, buying whole life is a great way to plan for retirement. If you purchase a 30-year term policy when you’re 20 years old, the term will end when you’re 50, which is well before theaverage retirement ageof 63. If you purchase whole life at the same age, however, you’ll still have it when you turn 70, 80 or even 90.

The fixed death benefit is also a major advantage. One of the reasons it’s so important to plan ahead is that it allows you to determine how much your family needs to replace your lost income. Whether that income comes from a job or a retirement account, your beneficiaries may need a significant amount of money to cover their expenses after your death. With a fixed death benefit, you know exactly how much they’ll receive.

Some whole life policies pay dividends, which are periodic payments based on the insurance company’s profits. Because dividends are based on profits, they’re not guaranteed. If your insurance company loses money, you may not receive any payments, or your dividends may be lower than expected.

Finally, whole life has some tax benefits. No matter how quickly the cash value of your policy grows, you won’t pay any income taxes on it. After you pass away, your heirs may have topay tax on the interest earned, but the death benefit generally isn’t taxable.

Long-Term Planning

Because whole life policies have a guaranteed cash value, many people use them as part of their long-term financial planning. For example, you can buy a whole life policy and use the cash value as part of your retirement portfolio. You may even be able to use the cash value of your policy to make charitable donations, making you eligible for deductions that can reduce your taxable income.

Receiving dividends can also help with your long-term planning. If you receive a dividend, you can use it to pay your premiums, leaving more money available for other expenses. Some people also use dividend payments to increase their death benefit, giving your beneficiaries extra protection as you get older.

Another benefit of receiving dividends is that you can reinvest them in your policy. This makes it easier to build cash value. By combining these strategies, you can give yourself a more secure financial future and ensure that you have something to leave your heirs.

Universal Life Insurance

Universal life insurancestays in effect until it matures, provided you have at least $1 in cash value. The maturity date depends on the terms of your policy, but it’s common for the coverage to end when you turn 95 or 100. Some policies have earlier maturity dates, while others remain in effect until age 121 — far beyond when most people need them.

Features of Universal Life

Even though the coverage ends on your maturity date, universal life is classified as a type of permanent life insurance. Therefore, you have lifelong — or nearly lifelong — coverage rather than coverage that’s set to expire after 5 to 30 years. Many people choose universal life over term life because they want the extra peace of mind that comes from having life insurance for as long as possible.

Like whole life, universal life builds cash value. This cash value earns interest, increasing the value of your investment over time. You can even take a loan against the policy’s cash value or use some of the cash value to pay your premium, giving you more flexibility.

Some insurance companies even let you adjust the death benefit after you purchase a policy. If your needs change, you can increase the death benefit to ensure that your family has the right amount of protection. You may even want to reduce the death benefit to save money on your premium.

Advantages of Universal Life

One of the main advantages of universal life is that you don’t owe any taxes on the current interest or earnings. Although your beneficiaries may have to pay tax on the interest, they won’t owe any tax on the death benefit. This makes universal life a great way to take care of your heirs without leaving them with a significant tax burden.

One of the biggest differences between a whole life policy and a universal life policy is that universal life is more flexible. If your financial situation changes, you’ll have the opportunity to lower your premium, leaving more cash available to buy food, pay for housing and cover other expenses.

Assessing Your Life Insurance Needs

When you’re ready to shop for a life insurance policy, there are three ways to assess your needs: apply rule-of-thumb calculations, use online tools or seek professional advice. Even if you’re comfortable using online tools and performing rule-of-thumb calculations on your own, it’s always helpful to talk with a professional about your life insurance needs.

Rule-of-Thumb Calculations

A “rule of thumb” is a way to estimate something. If you apply one of these rules, you’re not looking for an exact amount, but an approximation of what you need. When choosing a death benefit, a common rule of thumb is tomultiply your annual salary by 10. For example, if you earn $100,000 per year, you’d want to purchase a policy with a death benefit of $1 million.

Some insurance professionals recommend multiplying your annual salary by 5 or 7 to estimate how much coverage you need. Although it costs less to purchase a policy with a lower death benefit, using a smaller multiplier is a bit riskier, as you may end up with less coverage than you need.

Rule-of-thumb calculations also ignore many of the factors that make your situation unique. For example, if you have a child with support needs, the 10x calculation doesn’t account for how much it costs to provide ongoing physical therapy, occupational therapy, personal care and other medical services.

Online Calculators and Tools

Online calculators are a little more flexible, allowing you to enter details about your financial situation instead of using a general rule of thumb. For example, thelife insurance calculatoroffered by Worldwide Assurance for Employees of Public Agencies allows you to enter your age, annual income, total savings and total debt to determine how much coverage you need.

TheDepartment of Veterans Affairs life insurance calculatorallows you to enter even more details about your situation, making it easier to choose a death benefit. This tool has more than 20 fields for everything from the outstanding balance on your auto loan to the value of your current investments. You can even include income from annuities, rental properties and other sources for a more accurate view of your finances.

Seeking Professional Advice

If you’re not comfortable choosing a policy on your own, talk with an insurance agent or a financial advisor. Someinsurance agentswork for just one insurance company, while others sell policies on behalf of multiple insurers. An agent can help you determine which type of life insurance is best for your current situation and financial goals.

Financial advisors advise on a broad range of money-related topics. Your advisor can help you determine how much life insurance you need, make investment recommendations, explain the benefits of different financial products or refer you to an estate planning attorney if you want to include life insurance in your end-of-life planning.

Determining the Right Coverage Amount

You already know about using rules of thumb and online tools, but there are more accurate methods of determining how much life insurance you need. They include the income replacement method and the needs-based approach. No matter which one you choose, it’s important to balance affordability with coverage so that you don’t have to let the policy lapse because you can’t afford the premium.

Income-Replacement Method

The income-replacement method assumes that you’re buying life insurance to ensure that your family has enough money to replace your lost earnings after you pass away. To use this method, you must estimate the remaining value of your life. The first step is to determine your after-tax income.

After-tax income is theamount of money you have leftafter state and federal taxes have been deducted from your gross income. Determine your after-tax income by looking at your pay stubs and noting how much you’ve earned in the past 12 months. If your job pays a base salary plus commissions, you may want to use your base salary, as commission income isn’t guaranteed.

The next step is to subtract your personal expenses from your net income. After your pass away, your family won’t need to pay these expenses, so you can exclude them from your life insurance calculations. For example, you can subtract the cost of your food, clothing and transportation. If you don’t have detailed records related to your spending habits, estimate the percentage of your net income that you spend on personal expenses each month.

Finally, decide whether to include your employer’s contributions to your retirement account. That money isn’t included in your earnings now, but it does represent a future source of income for your family. Therefore, you may want to increase your death benefit accordingly.

Planning for the Future

Now that you understand your current financial situation, you can think about the future. The first step is determining how many years of income you must replace. If you’re already 50 and planning to retire by 65, you may only need to replace 15 years of income. Someone who buys life insurance when they’re 25 may need to replace 40 years of income.

You also need to account for salary increases and inflation. If you’re early in your career, your salary will likely increase over time, especially if you get a promotion or work for a company that offers regular bonuses, merit-based raises and other financial incentives.

The Federal Reserve has aninflation target of 2%to keep prices stable without causing a significant rise in unemployment. Unfortunately, the COVID-19 pandemic ushered in an era of high inflation due to economic uncertainty and disruptions in the global supply chain. In May 2023, theinflation rate was 5.3%, according to the U.S. Bureau of Labor Statistics.

You could use the 2% target in your planning, but using a higher inflation rate makes it a little easier to plan for the future. If inflation soars after your death, your death benefit will be high enough to cover your family’s expenses despite increased prices. Accounting for inflation ensures that your beneficiaries can maintain their current standard of living many years in the future.

Finally, you need to subtract certain assets and add in large one-time expenses. If you have stocks, bonds and other investments, your family may be able to live on some of that income, reducing the amount of life insurance you need. When you pass away, your family will need to pay for your funeral and settle your estate, so they’ll need enough money to cover lump-sum payments.

Pros and Cons of the Income-Replacement Approach

The major advantage of this approach is that it’s more accurate than using a rule-of-thumb calculation. It’s also easy to apply the income-replacement approach even if you have limited knowledge of insurance and other financial topics.

One of the disadvantages of this approach is that it focuses solely on income. It doesn’t account for other aspects of your financial situation, such as the need for extra income to care for a child with a disability or pay college tuition for multiple children. The income-replacement method also involves a lot of math, so it’s a little more complex than general rules of thumb.

Needs-Based Approach

Instead of focusing on your income, the needs-based approach focuses on your financial needs. If you apply this approach, you’ll have the opportunity to determine how much future income your family needs to maintain its current lifestyle. You’ll also be able to account for your final expenses, ensuring that your beneficiaries don’t have to take on debt to cover your funeral or burial costs.

To use the income-based approach, you must create a detailed budget. This budget should list every debt and expense you have. In some cases, it’s helpful to overestimate to account for inflation and ensure that you don’t choose a death benefit that’s too low.

For example, grocery costs are almost guaranteed to rise over the next 10 years. If your family currently spends $800 per month on groceries, you may want to round that up to $1,000 or even $1,200 when determining how much life insurance you need.

Don’t forget to include expenses that you only pay a few times per year, such as auto insurance premiums, car maintenance fees, health insurance deductibles and summer childcare fees.

Balancing Affordability and Coverage

The more coverage you have, the higher your premium will be. Therefore, it’s important to choose a policy that offers a good balance of affordability and coverage. If you choose the policy with the lowest possible premium, its death benefit may not be enough to meet your family’s needs. Picking a $2 million death benefit when your family could easily live on a $1 million payout will drive up the cost of the policy, leaving you with less cash on hand for other expenses.

Selecting a Reliable Life Insurance Provider

Once you decide what type of policy you want and how much coverage you need, it’s time to purchase life insurance. It’s extremely important to choose a reputable provider with a track record of good customer service and timely payments to beneficiaries. Use these tips to find just the right provider for your needs.

Researching Insurance Companies

With careful research, it’s possible to avoid insurance-related scams and find a company that provides excellent service. Here’s what you should consider whenresearching an insurance company:

• Product offerings: Many companies offer life insurance, but they may not offer the type of policy you need. For example, if a provider only sells term when you want to buy universal life, it’s not a good fit for your needs.
• Costs: The premium isn’t the only cost associated with having a life insurance policy. Depending on what type of coverage you buy, there may be sales charges, administrative fees, surrender charges, fund management fees and other expenses. Look for an insurance company that has what you need at an affordable price.
• Ethical principles: Look for an insurance company that follows theethical principlesestablished by the Insurance Marketplace Standards Association.
• Customer service: The company you choose should offer several contact options and strive to respond to queries within 24 to 48 hours. It should also have helpful representatives who will treat you with respect. If you’re concerned about customer service, call each company and see how long it takes for someone to answer the phone.

Evaluating Financial Strength and Ratings

When you shop for groceries, you generally don’t think about the financial stability of your favorite grocery store. So why would you need to evaluate the financial strength of an insurance company? Because you need to know that the company will still be around when you pass away and your beneficiaries want to claim their funds.

A.M. Best, Moody’s Investor Services, Fitch Ratings and other companiesrate insurersbased on their ability to satisfy claims and other financial obligations quickly. Each rating provides a measure of an insurance company’s financial stability.

If you include third-party ratings in your research, you should know that each company uses its own rating scale. The top rating at one company may be a lower rating at another company. Therefore, you shouldn’t base your decision on a single rating. Look at the data from several ratings agencies to find out how each insurer stacks up against the others.

Understanding Policy Terms and Conditions

Your policy spells out everything you need to know regarding the amount of coverage you have, any limitations on that coverage and how much you can expect to pay in fees. As you read through your policy, look for the following terms:

• Cash surrender value: This is the amount of money you’ll receive if youend your coveragebefore the policy matures. If you have any outstanding loans against the cash value of the policy, you may receive less than the cash surrender value listed in the policy documents.
• Evidence of insurability: This is a statement that confirms you qualify for coverage.
• Face amount: The face amount of a life insurance policy is the amount paid out when the policy matures or when you pass away.
• Accelerated death benefit rider: This is an extra benefit that pays out a percentage of your death benefit while you’re still alive if you’re diagnosed with a terminal illness. Aterminal illnessis an advanced disease that can’t be cured.

Depending on the terms of your policy, you may be entitled to additional coverage beyond the face amount. For example, it’s common for insurance companies to pay out more for accidental deaths than they do for deaths associated with natural causes. With this term in place, your beneficiaries will receive more money if you pass away due to an auto accident than if you died due to a heart attack.

Tips for Purchasing Life Insurance

Now you’re ready to buy a life insurance policy. Before committing to anything, shop around and find a company that has what you need at a price you can afford. Here are a few tips to help you get the best coverage at the best price.

Comparing Quotes From Multiple Insurers

When you buy a new car, you probably look at several models and test drive each of them to determine which one is the most comfortable and has all the bells and whistles you need. That’s the same approach you should take when buying life insurance. Instead of buying a policy from the first insurance company you come across, it’s important to get multiple quotes.

There are a few ways to get quotes from multiple insurance companies. The first is to visit each company’s website and fill out a quote request. You may have to provide your age, ZIP code and other details to help the insurer provide an accurate quote. If you don’t want to enter your information online, you can also contact each insurance company by telephone.

Another option is to use a website that provides quotes from multiple insurers. The main advantage of this method is that you only have to fill out one form instead of contacting each insurance company individually. You’ll receive multiple quotes, making it easier to compare costs and determine which insurer provides the best level of coverage at the most reasonable price.

Remember that a quote is just an estimate. The price of your policy may change once you fill out a formal application or undergo a medical exam. For example, if the medical exam reveals that you have high blood pressure, your premium is likely to increase. It’s also possible for an insurance company to reject your application outright if your medical exam uncovers a chronic health condition.

Reading the Fine Print

Before you sign an insurance contract or pay the first premium, read the fine print closely. It tells you exactly what you need to know about your death benefit and any policy limitations. For example, most policies have a list of conditions under which the insurance company won’t pay a claim from your beneficiary.

Many policies also contain riders, which may give you access to accidental death benefits, disability benefits or premium waivers. Adding a rider typically increases your premium, but it can give you extra peace of mind when you’re buying life insurance.

Disclosing Accurate Information

When you apply for life insurance, it’s essential to provide accurate information. Insurance companies use databases and other resources to verify everything, so any discrepancy may cause a company to reject your application. Even if you get a policy based on erroneous information, the insurer may cancel your coverage once they discover that your application contained inaccuracies.

Reviewing and Updating Your Life Insurance Coverage

Many people make the mistake of buying life insurance, putting the policy documents in a file folder and never looking at them again. If you do that, there’s a good chance your needs will change at some point, rendering your coverage inadequate. That’s why it’s so important to assess your needs regularly and understand the life changes that should trigger a policy adjustment.

Periodic Assessment of Changing Needs

You should review your needs at least once per year to determine if you need to make any changes to your life insurance coverage. There are many life events that should trigger a policy adjustment:

• Additional dependents: If you have more dependents than you did when you bought your policy, you may need to increase your death benefit.
• Disability: A disability may prevent you from working or increase your medical expenses. Therefore, you may need to adjust your policy if you develop a disability after signing up for life insurance coverage.
• Death of a spouse: Many married couples pool their income and use it to pay shared expenses. If your spouse passes away, however, you’ll have to use your income to pay for housing, food and other necessities. As a result, you may not be able to save as much in your retirement accounts, increasing the amount of life insurance you need.
• Marriage: If you bought life insurance when you were single, you should revisit your policy once you get married. After all, you’ll need to include your new spouse in your end-of-life planning.
• Home purchase: As a homeowner, you must pay property taxes, do regular maintenance and pay for needed repairs. If you purchased your life insurance policy when you were renting, you should consider updating your death benefit once you buy a home.
• Job changes: If you used the income-replacement approach, your death benefit is based on the amount of money you were earning when you purchased the policy. Major job changes should trigger a review of your coverage to determine if you need to increase the death benefit to match your new income level.

Re-evaluating Coverage as Your Financial Situation Improves

If you’re on a tight budget, you may have to purchase a policy with a small death benefit. Although it’s better to have some coverage than no coverage, you should consider increasing your death benefit once your financial situation improves. For example, if you land a promotion that increases your income by $20,000 per year, you can use some of that money to pay a higher premium.

Find the Right Coverage

Buying life insurance isn’t as exciting as attending the Super Bowl or having your first child, but it’s something you need to do. A good life insurance policy ensures that your beneficiaries will have enough money to pay your final expenses and maintain their current lifestyle even after you pass away.

If you purchase whole life or universal life, you may even be able to borrow against the policy, earn interest or receive dividends, making it possible to strengthen your financial circumstances. When you’re ready to buy life insurance, make sure you use a reputable company with solid financial ratings. Once you have a company in mind, it’s important to read the fine print and ensure that you understand every term of your policy.

No matter how young and healthy you are, tomorrow isn’t guaranteed. If you don’t have life insurance, contact an insurance agent or a financial advisor today. Buying a policy can give you extra peace of mind and help you leave a lasting legacy for your family members and friends.