Life insurance is a benefit purchased to financially assist loved ones that are left behind when the insured passes away. Andrew Beattie of Investopedia explains, “Life insurance is an agreement wherein an insurance company agrees to pay a specified amount after the death of an insured party as long as the premiums are paid and up to date. This amount is called a death benefit. Policies give insured persons the assurance that their loved ones will have peace of mind and financial protection after their death” (investopedia.com). Purchasing life insurance comes in two categories; whole life and term life policies. Whole life policies are permanent for the duration of life as long as premiums are paid. Beattie asserts, “some permanent life policies offer an investment component that allows you to build cash value, taking the premiums you pay and investing them into the market” (investopedia.com). On the other hand, their are term life policies that offer coverage for a specified and set amount of time depending on the time length purchased. Beattie warns, “some policies allow you to renew your coverage after a certain expiry date, while others require a medical exam to do so. Between term life and permanent life insurance, term life tends to offer cheaper premiums” (investopedia.com).
Purchasing life insurance is a financial planning tool to provide coverage when needed. Life insurance, however, may not make sense foreveryone; for instance, a single woman, with no dependents and financial liquidity may not need to purchase life insurance, but conversely, a single mom of two, with two jobs and mounting debt will be more financially motivated to purchase a life insurance policy. “But if you’re the primary provider for your dependents or have a significant amount of debt that outweighs your assets, insurance can help ensure your loved ones are well taken care of if something happens to you,” cautions Beattie (investopedia.com). Beattie also warns that life insurance does not cover all situations, other add-ons (riders) may need to be purchased to cover extenuating circumstances such as disability or long-term care, but premiums will increase.
If the decision is made to purchase life insurance, how much is necessary to fiscally support the dependents and financial dealings left behind? Beattie asserts, “Financial experts often recommend purchasing 10 to 15 times your annual income in coverage, though your personal number may be higher or lower” (investipedia.com). NaphurGambhir of Policygenius recommends calculating your salary, everyday living expenses, debt, and dependents and then subtract your liquid assets to determine the amount of insurance coverage to carry. She suggests using what is referred to as the DIME method, an acronym for debt, income, mortgage, and education. Tally up existing debt, income multiplied by the number of years the policy is supposed to assist your family, remaining balance on the mortgage, and the cost of dependent education, this sum gives you a rough estimate of what is needed. Consider adding insurance riders to a policy to further enhance and protect dependents while you are alive. Gambhir explains insurance riders as additional add-on provisions that supplement a life policy and provide extra financial security.
As a financial supplement, life insurance can provide for adequate compensation in the event of death. Sometimes it’s unclear how long to hold coverage for and every situation is different. Policygenius suggests health and age determine not only how much insurance you should buy, but how long your coverage should last. Typically, the older you get, the less coverage you will likely need, as debt and dependent support should decrease. “Age is an important consideration when setting your coverage amount, but is not a reason to put off getting a policy. Life insurance rates increase 4.5-9% every year you age, as older individuals are riskier to insure. If you purchase a policy when you’re young and healthy, you’ll get a more affordable premium for a potentially larger amount of coverage,” reports Gambhir (Policygenius.com).
Ultimately, you should purchase what you can afford. The policy will not do much good if the premiums cannot be paid and the policy lapses. When considering affordability, Barbara Marquand of Nerdwallet suggests, “consider buying multiple, smaller life insurance policies, instead of one larger policy, to vary your coverage as your needs ebb and flow. This can reduce total costs while ensuring adequate coverage to the times needed,”. If you have a term policy and you are nearing expiration there are options. If the end of the term on your policy is approaching, consider converting the term policy into a permanent policy if possible. Aubrey Cohen of Nerdwallet warns, “If you re-evaluate your insurance and decide that you want to buy permanent life insurance, converting your term life policy may seem like the most convenient way to do it. But if you’re still in good health, it might not be the cheapest route. Be sure to get quotes for a new whole life policy, too”. Maybe purchase another term policy for a shorter term to offset the price tag of a new policy at an older age. However, if you are retired, have no substantial debt or your kids are on their own, then a renewal, conversion or new insurance may not be necessary. The result is one less expense.
One final thought, if you don’t need the life insurance policy you bought 25 years ago then another option for your policy is a life settlement. A life settlement is when a licensed buyer known as a life settlement provider, purchases your policy for a lump sum cash payout and collects the death benefit. This could be beneficial if you were looking to supplement income during retirement or pay down certain expenses. You can spend the money in any way you choose. Sarah O’Brien of CNBC cautions, “Don’t expect to get the face value of your policy: The settlement comes in somewhere above the cash value and below the death benefit. The exact offer depends on a variety of factors, including the premium amount, the cash value and whether there are any loans against the policy. The amount also depends partly on your life expectancy, which in turn is based on your age and your health. The shorter the life expectancy, the larger the settlement” (CNBC.com). This is where MRE Finance can help you with a “Life Settlement” and will guide you through the process and help to value your policy for a lump sum cash payout. You can call 1-800-521-0770 to speak to a specialist or see what your policy could be worth in minutes by using the free life settlement calculator mrefinance.com/free-life-settlement-calculator. It’s that easy and you might be surprised about how much you can sell your policy for.
Life insurance is important for families and protecting them financially. As the years pass, children become independent and the need for life insurance may diminish. However, if your health takes a turn for the worse, your life insurance policy may provide the necessary funds to pay for those medical bills. More policies can be purchased to extend support, or they can be sold when needed the most.