Buying life insurance for the first time can be confusing. Not only do you need to decide what type of life insurance to purchase, you need to determine how much life insurance you actually need. So, before you begin the process, check out these tips for first-time life insurance buyers.
Determine a Coverage Amount
Don't let anyone else tell you how much life insurance you need. It isn't difficult to determine the right coverage amount on your own. Get a good coverage estimate by adding together the estimated costs of your funeral and burial expenses, the total amount of your debt, and approximately six months to one year of your current income. Alternatively, you multiply the amount of your annual income by eight to determine a coverage amount. While both options give you a rough estimate of the amount of coverage that you need, they should give you a good idea of how much money your family will need to have in order to pay for your funeral, burial, and debts, as well as maintain their current standards of living until they can replace your income. You can increase or decrease the amount you've calculated as needed. For example, you might want to factor in five to 10 years of money for your family to live on if your spouse doesn't intended to work after your death or your children will need money for college tuition in the near future.
Get Multiple Quotes
Don't choose a life insurance policy without obtaining quotes from several different carriers. This way, you know that you're getting the most competitive rate possible. Additionally, you need to obtain quotes for both term and whole life insurance before making a final decision.
Term life insurance will have a lower monthly premium. However, the policy will only pay out if your death occurs within the term of the policy — typically anywhere between one and 30 years. Whole life insurance has higher premiums, but the policy pays out regardless of when you die. With a whole life insurance policy, the premiums and the cash value remain the same throughout the duration of the policy. In most cases, these policies can be cashed out, if needed, once you've made a certain amount of payments.
Choose a Beneficiary
Purchasing life insurance is a good way to ensure your children are taken care of financially after you die, but you shouldn't name a minor child as your beneficiary. If you name a minor as your beneficiary, the insurance company can tie up the money until the child turns 18. Instead, choose a reliable adult or create a trust to use as your beneficiary. This way, your children are taken care of financially regardless of their age.
If you want to make sure your family has the money they need to maintain their current lifestyle after you die, buying life insurance is a smart move. Just make sure you purchase the right amount and correct policy type, as well as choose the right beneficiary.