Life insurance is important because at the devastating time of a family member’s death you have enough to deal with besides worrying about money. Did you know the average funeral cost ten thousand dollars? That’s the price of a regular funeral, nothing fancy. So with that in mind it’s important to consider what will happen to your family god forbid something happens to you or the primary earner of your family. Dealing with the loss of a loved one is hard enough; don’t make it any harder by leaving them with financial burdens as well.
So how much insurance is enough? There’s simple formula to figure that out. Take the insured’s yearly income and multiply that number by ten. The sum is how much the face amount of your insurance policy should be. The reason being is that the family can conservatively invest the life insurance money and at ten percent interest the family can live off the interest’s payments. The interest payments at ten percent will equal the yearly income of the lost love one (insured). That way the family lives the same life style they are accustomed to while never touching the principal amount of life insurance money. Example- Joe makes forty thousand dollars a year. Multiply forty thousand times ten and you get four hundred thousand. This is the amount of insurance Joe needs. Now Joe’s family can live the same lifestyle they are accustomed to off the interest of the four hundred thousand and never spend the actual four hundred thousand. Save it for your kids or retirement don’t go spending it “willy nilly.”
Another very important factor in life insurance is affordability. If you can’t afford the amount in the formula provided above then get a quote for a smaller amount. Most policies lapse after thirty days of non payment. Meaning if you’re more than thirty days late on your payment your policy is cancelled without refund. So make sure you can afford the plan. Don’t be talked into a more expensive plan if you can’t afford it.
The cheapest type of life insurance is term. Term life insurance is only good for a certain amount of time. Could be from five years to thirty five years or anything in between depending on the insurance company. Advantage is, its cheap. The disadvantage is after the term you’re no longer covered. You have to then search for new insurance and now you’re older. The older you get the more expensive it gets. There is a new type of insurance called ROP (return of premium) term insurance sold by AIG. It works likes this, if you have an ROP twenty year term and the insured doesn’t die after twenty years the insured gets a 100 percent of his premium payments (monthly payments) back. So in essence its like free insurance, if you die, your family is protected and if you live you get all your money back. Not a bad deal at all. It is more expensive than a traditional term policy, however in my opinion well worth it. There are other types of life insurance of course like, universal life, variable life, and variable universal life. Next time I’ll get into the differences of these various life insurance products. Keep in mind when purchasing any type of insurance; it’s all about finding the right product to fulfill your specific needs. Different products do different things and they all have advantages and disadvantages. Identify your needs and try to find a product that will satisfy them. Happy insurance shopping.