If you are like most responsible adults, you have probably thought about purchasing life insurance in order to protect your finances. Choosing the right life insurance policy and setting it up correctly can help you to recover from even debilitating losses, but unfortunately, making the wrong decisions can cost you. Here are two important things to remember as you work with your agent to create a policy, so you can appreciate the benefits that these policies have to offer.
1: Select the Right Amount of Insurance
As you start to explore life insurance policies, the first decision that you will be confronted with is how much insurance to purchase. Different plans offer various coverage levels, ranging from a few thousand dollars to upwards of over a million. One mistake that many people make, however, is picking a policy that isn't sufficient for their needs, or that they can't afford.
If you purchase too small of a life insurance policy for yourself or for a family member, you might struggle to pay for something as basic as a funeral. On the other hand, selecting too much insurance might mean a monthly premium payment that you can't afford. Unfortunately, if you don't pay your premiums on time, your policy can be revoked. In order to decide the right amount of coverage, remember these tips as you shop for a policy.
- Tip #1: Think Income Replacement: Life insurance can help with many expenses involved with settling a deceased person's estate, but one of its main purposes is to act as an income replacement. To figure out how much insurance you need for each person of your family, start by thinking of their yearly income, and then multiply that total based on the number of years you want to replace it. If you are buying coverage for yourself or for another main breadwinner, financial experts generally recommend buying enough coverage to replace 10 years of income.
- Tip #2: Consider the Age of your Family: The age of your family can affect how much insurance you need. If you have young children who would need to be supported for many years to come, you might need to purchase a larger policy that could replace income for a longer period of time.
- Tip #3: Adjust your Total for your Spending Habits: Buying an insurance policy based on your yearly income won't help you very much unless you are used to living within your means. When you select a policy, take your family's spending habits into account.
Choosing the right life insurance amount for your needs will help you to accommodate for financial losses, so that you and your family can start the healing process.
2: Mind your Beneficiaries
Over time, your family dynamics will ebb and flow. Couples have additional children, and kids grow up and get married. Your own marriage could even change. You and your spouse might grow apart and get divorced, and you might decide to remarry. Changes are inevitable, but they can drastically affect the efficacy of your life insurance policy.
Sometimes after people select a policy, they simply shove the paperwork into a file cabinet and forget all about it, until someone dies. When you set up a life insurance policy, you will choose beneficiaries. These individuals are the ones who receive the insurance money after the insured person passes away. Failing to update these beneficiaries appropriately can cause big problems.
For example, a Virginia man named Warren Hillman died in 2008, and left behind a life insurance policy worth over $100,000. Unfortunately, he forgot to update his beneficiary when he got divorced ten years earlier. Because his ex-wife was listed as the beneficiary of the policy, she was granted the entire total, instead of the grieving widow.
As your family grows and changes, don't forget to update your life insurance policy. Make sure to add additional children as beneficiaries, and never forget to remove people who you wouldn't want to provide for in the future.
Being smart when you purchase life insurance can help you to keep your family self-reliant, even after enduring tragedies.