Life insurance is an important part of financial planning. It is never too early to purchase a policy. While you may feel that you are young and healthy and don't need life insurance, the fact is, it will never be as inexpensive as it is for you today. It is a proven fact, the older you get, the more expensive it becomes to purchase a life insurance policy. The best age to purchase life insurance is before the age of 35. That being said, we’d laid out the benefits of purchasing life insurance and what to look for in a good policy.
Why purchase life insurance?
Depending on the type of life insurance policy that you purchase, your life insurance may accumulate cash value. This cash value is yours to use in your lifetime, it is not just for your beneficiaries. You can borrow against it for a down payment on a home or other expenses that may come along. If you have your policy for many years when you reach retirement age, you may opt to use the money you have accumulated to supplement your retirement income.
Another life insurance benefit is that it also protects your family in the event that you pass away. No one likes to think about this possibility but other than taxes, it is the only thing that you can be sure of, one day you will die. Leaving your family with debts that they have no way to pay is not something anyone wants to do. Whether it is a mortgage, credit card debt or just final expenses, a life insurance policy can make sure that this is not a burden that someone else has to assume.
What Type of Life Insurance Do I Need?
Life insurance comes in two basic forms, whole life and term life. Both of them have a place in your financial planning. Whole life is a policy that has a payment that will not increase and will last until you pass away. It earns dividends and you can borrow against the accumulated cash value. If you have this for a long time, the value will go beyond the face value of the policy. Term life is what it sounds like, life insurance that lasts for a certain term, it can be 20 or 30 years but at the end of that time, if the policy is not renewable, the policy terminates. With most term policies there is no accumulated cash value.
How Much Life Insurance Do I Need?
In order to answer this question, it is best to discuss the particulars with your insurance agent or estate planner. Some basic questions need to be answered
- Who counts on my earnings to survive?
- What resources do I have?
- What debt do I have?
- Have I provided for my final expenses?
- How old am I and how healthy?
- Do I want to leave a legacy to anyone?
Once all of these questions have been answered, a number can be reached. A general rule of thumb is that your insurance coverage should be 10-12 times your annual income.
If you are considering purchasing life insurance or having your current coverage evaluated, at Chandler & Knowles CPAs we know that life insurance is part of a total financial planning package and we would be happy to help you to make sure that you have all the coverage you need.