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Life insurance can be confusing and complicated, but it boils down to having a backup plan. It’s a way to protect your family and business and lessen the financial blow in case you die unexpectedly. If you have people who rely on your income to survive, you might want to consider life insurance.
If you have loved ones relying on your income who would suffer a financial loss if you died unexpectedly, you might want to consider life insurance.
Life insurance plays a key role in financial planning. It protects your family and gives them a sense of financial security for the future. It offers liquid cash to cover expenses, including your funeral costs, outstanding debt — like a credit card or student loan, mortgage payments and college costs. For a grieving family, life insurance alleviates some of the stress that comes with managing money when a key earner or breadwinner is no longer around.
When you die, your life insurance policy kicks in to provide the money your beneficiaries need to maintain their lifestyles. Along with replacing your income, the death benefit can also be used to pay estate taxes, donate to charity and leave an inheritance to your children or grandchildren. Speaking of legacies, if you’re in a second marriage, it can help to balance things out and serve as an asset to pass on to your kids and spouse.
If you’re a business owner or partner, think of a life insurance policy as a backup plan: It can cover your most valuable employees and provide much-needed cash flow for the company while it recovers.
If these situations apply to you, consider purchasing coverage:
If you’re a partner in a business, life insurance can fund a buy-sell agreement, too. If one partner dies, the other one can use the death benefit to buy out the rest of the business.
To protect your family’s wealth, you could use a permanent life insurance policy as an estate planning tool. When you die, your heirs could use that money to pay the estate taxes – which are due nine months after your death.
You can either use an agent or broker, or you can purchase a policy directly from the insurer. Either way, it pays to do your research, collect quotes and compare providers and policies to make sure you’re getting the most value for your money.
When you’re working out how much coverage to carry, consider three things: your income, your assets and your financial obligations.
The general rule of thumb is to buy a policy that would replace your income and cover your family’s cost of living for five to 10 years. To crunch the numbers, choose a target number — like 10 years — and work backward. Use your salary as a starting point, and think about any other funds your family would have access to when you die, like 401(k)s, savings accounts and Social Security. If you think your family would need $500,000 to pay for their living expenses over 10 years, a $500,000 policy may suit you.
A simpler way to do this is to stick to your salary. If you’re earning $50,000 a year, you might be a good candidate for a $500,000 policy.
As you climb the career ladder, you’ll most likely build your wealth and acquire assets, such as a house, car, savings account or a healthy 401(k). These assets make up your estate. When you’re calculating how much life insurance to buy, add up your assets. This gives you an idea of how much coverage you need to add to your policy, on top of your income.
Let’s say your estate is worth $250,000. A $250,000 policy can protect that and provide liquid cash to pay estate taxes.
That being said, if you’re a careful saver with healthy bank accounts and lucrative investments to your name, you may not need as much life insurance.
To find this dollar figure, think about everything you pay for now and everything you expect to pay for in the future. Your responsibilities may include:
Remember, you should only buy as much life insurance as you need. If you end up earning more money, acquiring more assets or picking up more financial responsibilities, you can purchase another policy to cover those needs. This is known as laddering.
The application process is pretty straightforward, but can take between three and eight weeks. With most providers, you can expect to go through these steps:
At its core, life insurance is simple: Pay now to protect your family and business later. If you have financial dependents, you might want to consider life insurance. When you die, your policy would provide them with cash to cover their living expenses and would ensure they’re not saddled with a financial mess.
To learn more, check out our guide to life insurance.
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