Buying life insurance for the first time is an important financial decision. You’ll be allocating funds for the people you love so that they have what they need for expenses for your funeral, medical bills, and even to pay off your debts after you pass away. But buying a policy for the first time can leave you feeling like a deer in the headlight. You want to find the right policy for your needs, but you can’t do that if you don’t know what you’re looking for. Additionally, it’s important to check out what multiple different insurance agents offer before you make a final decision, and whether certain assets like home ownership might affect that. Here’s what you need to know when you’re a first time life insurance buyer.
Did you know there is more than one type of policy? The kind of policy you get can determine the premium you pay and how long you are covered. Here are the two primary types of life insurance policies:
Term Life insurance
Term life is usually much more affordable than whole life. They offer terms of 5, 10, 15, and 20 years. If you die at any time during the years that the policy is active, the full amount of the death benefit will be paid out to your beneficiaries. This type of insurance can usually be converted into a whole life policy but as they stand, they only offer temporary coverage.
Whole Life Insurance
This type of life insurance is more expensive than term life. It’s also called permanent life insurance as well. There are some benefits you can access through whole life policies that you can’t get with term life. These include the option to take out a loan against it and the option to cash it out. When you pay for whole life, part of your payment goes into a bucket that grows in value over time. This cash value can be accessed if you choose to cancel the policy. This is not something that term life policies offer.
The monthly premium is the amount you pay to stay covered. If you fail to pay the monthly premium, eventually the policy will be canceled. The premium is based on several factors including the amount that the policy would payout on your death and any risk factors you have. People with more health conditions will usually pay more for their life insurance policies. Some policies with payments over a certain amount also require physical and other health tests to help them determine your eligibility and your rates.
The death benefit of a life insurance policy is the amount of money that your beneficiaries get paid upon your death. Some life insurance policies come with other benefits that you can access while you are still alive, but the death benefit is the primary reason that most people get life insurance. Many people say that it’s important to choose an amount that is 3-5x your annual salary especially if you have children or you are the sole income earner in your household. Additionally, choosing a death benefit amount that covers any debts, including your mortgage, is critical as well.
Some policies can help you pay for college costs for your children, others will cover end-of-life expenses like hospice. Still, others can help you fund things like childcare after a spouse passes away. Finding out how the policy can be used and how to access the funds after death is important. It’s also important to know if there are any exclusions for previous conditions. Most policies only cover accidental death or death from sickness, and may have exemptions for so-called “avoidable” causes of death..
Selecting who will get access to your life insurance funds is critical. If you want your spouse to get some, but also earmark some for your children, you need to be sure to include that when you start your life insurance policy. Getting a policy for the first time is overwhelming, so make sure you have all the information you need to get started. The truth is that anyone can be a beneficiary of your life insurance policy.
Choosing a life insurance policy is an investment in the future of your family after you pass away.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.