Dying is not something that most people think about very often. The inevitability of it makes death a part of life. If others rely upon you and the income you earn, it is important to think about what will happen to them when you die. Life insurance is one way to provide them with financial security and personal factors determine how much is appropriate.
Is Life Insurance Necessary for Everyone?
People without dependents who have enough assets to cover their debts and costs associated with death do not need life insurance. Individuals with dependents who have enough assets to provide a comfortable lifestyle after their own deaths also do not need life insurance. However, many people have more debts than assets and dependents who will require financial support for an extended period. This is where life insurance benefits become invaluable.
Life Insurance As Investment?
Life insurance is considered an investment by some people but it is different than other types of investments. Some types of life insurance are used for saving money or investing it for retirement, growing a pool of interest-earning capital. The insurance company invests the money for its own benefit and pays a percentage to the policyholder for use of these funds. Investing money from a different type of forced savings program into an index fund is likely to provide more attractive returns.
Age and Insurance
Insurance companies publicise the fact that this cover is more difficult to qualify for as an applicant ages so they recommend securing a policy at a young age. These providers earn money by betting on the lifespan of an applicant. Young policyholders enjoy relatively inexpensive premiums and if they die suddenly, the insurance company has made a bad gamble.
Most young policyholders live for a long time and pay more expensive premiums as they age.
Life insurance may be less expensive when an applicant is young but qualifying for it is no easier. An insurance company is not likely to refuse cover to an applicant who will pay the premium associated with his or her category of risk. The lesson to be learned is to purchase life insurance if and when it is needed. Do not buy it at a young age out of fear that you will not qualify at later date.
Evaluating Life Insurance Needs
When selecting a life insurance policy, determine how much money dependents will need if you die. Calculate the amount of money needed to repay all debts in full. This includes paying off loans, credit card bills, and the mortgage payment. If you are the only household member providing income to dependents, calculate how much will be needed to replace income throughout the period of dependency and add one year of income to protect against inflation.
If money will be needed for university education or dependent relocation, estimate these costs. Sum all of these amounts to determine the desired cover limit.
Anyone whose death would result in a financial loss to you should be viewed as an insurable party. For example, the death of a business partner or a spouse who earns income would create a financial loss but the death of a child would not because it costs money to raise children.
To determine how much to insure this individual for, calculate the amount of income required for the desired period of financial dependency and add one year of income to account for inflation.