Having too little life insurance can be
devastating to your family should you make
an early exit. Having too much is an utter
waste of money. That makes knowing how
much you need--and what type of coverage
is best for you--a critical decision.
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Steps: |
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1. |
Determine if you need life insurance. If
no one, such as a spouse or a child,
depends on your income, then it's
pointless for you to insure yourself. Life
insurance is protection against lost
income-- no more, no less. Similarly, if
you are well-off financially, your family
may not need an influx of cash when you
die. |
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2. |
Calculate how much coverage you'll need.
Determine how much your beneficiaries need
to live on, and for how long. Losing a
loved one is difficult emotionally and
financially, and many dependents will want
a period in which they won't have to worry
about money. While two years is the
average cushion, some people may want to
make sure their beneficiaries are set for
life. Calculate all expenses for the
covered period, including big ticket items
like college and mortgages, as well as
living expenses like clothes and food.
Then subtract the amount of money you
think your beneficiaries will make from
salaries and investments (remember, they
may not go back to work right away). By
subtracting all estimated expenses from
the income you estimate your beneficiaries
will earn, you get a basic idea on how
much insurance coverage you need.
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3. |
Choose what type of coverage best meets
your needs. Insurance is protection, not
an investment. Think of insurance in terms
of decreasing responsibility as you get
older. When you are younger and have kids
and a mortgage, you need protection. As
you get older, your kids have graduated
and you likely have few or no payments
left on your mortgage, so you need less
protection. |
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4. |
Term life insurance is the simplest way to
go--you pay the premium and are covered
for a specific benefit for the period
during which you want coverage. When you
stop paying, you stop being covered. Term
is a much cheaper option in the long run,
and you can invest the money you would
have otherwise paid for whole life in
mutual funds. |
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5. |
Universal life policies allow you to
adjust your premiums as well as your death
benefit. Variable life lets you choose how
to invest the policy's cash value. A
portion of what you pay in premiums goes
into a cash value, which could increase
over time and can be redeemed before your
death. Unfortunately, the mortality
expense of all cash value policies goes up
significantly after age 60, so that you
could be in the situation where your
payment goes up drastically or your
investment account used to pay your
premiums quickly dries up. If you die with
a large cash value balance, your
beneficiary still gets only the face
amount, not the face amount plus the cash
value. |
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6. |
Whole life insurance has significant
drawbacks. First, the premiums are
generally far more costly--especially in
the early years of the policy, when you're
mostly paying commissions rather than
building cash value. Second, if you have
to cash out the policy early, you may have
to pay a surrender charge. |
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7. |
Check the ratings. Insurers run the gamut
from shaky upstarts to household-name
institutions. Most companies are rated for
financial strength and claims paying
ability by independent rating agencies.
Ratings from A.M. Best, Moody's, and
Standard and Poor's are the most often
cited. |
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Borrow against your life insurance
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Steps: |
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1. |
"Borrow" money from a cash value life
policy as an absolute last resort. If you
own a home consider an equity line before
borrowing from your cash value. With an
equity line, your interest is deductible
and you will most often get a better rate
than the insurance company is willing to
offer. (See
How to Obtain a Home Equity Loan.)
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2. |
Contact your insurance company if you have
no other options and find out how large
your cash value is and how much you can
borrow. The amount available to you
depends on how much cash has accumulated
in the policy. That, in turn, depends on
how long the policy's been around, how
much you've paid into it, and other
factors. For example, if you have a
$300,000 policy with a cash value of
$50,000, your borrowing capability will be
based on the $50,000 cash value.
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3. |
Understand that when you borrow against
your cash value, you must pay interest on
the amount you borrow. The interest you
pay does not go into your cash value, as
many people think. Instead it goes back
into the pockets of the insurance company.
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4. |
Carefully check the terms and conditions
of the loan. Some insurance companies
restrict how much of your cash value you
can borrow, and have special payback
terms. Make certain that the interest
rates are lower than what other loan
sources, such as home equity loans, are
offering. |
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5. |
Withdraw the money. There is no
restriction on how you can use the money,
as there is with a 401(k) withdrawal, for
example. You don't ever have to pay it
back, as long as you're willing to have a
reduced death benefit for your
beneficiaries when you do pass away. But,
you'll also pay interest on it for the
rest of your life. On top of that, any
interest you owe on that loan will also be
deducted from the payout. |
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Overall Tips: |
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Know the terminology. A premium is the
money you pay to keep the policy in force.
The death benefit is the payment dictated
by the policy to be made upon your death.
The beneficiary is the person or persons
who will receive the death benefit.
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The cost of term life insurance has been
falling, so it may be worth replacing an
existing term policy you have. Check
current rates for term life insurance at
comparison sites such as Term4Sale.com.
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Evaluate whether it makes sense to get an
insurance policy on someone else, such as
your spouse or business partner, whose
death would cause real hardship for you.
Insurance policies can be purchased for
just about anyone. |
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Overall Warnings: |
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If you borrow from a policy that is
characterized as a modified endowment
contract, you could create a taxable event
under certain circumstances. |
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If you stop paying premiums after 8 or 10
years when the cash value has risen
enough, and take a loan against it, you
may actually have to continue paying
annual premiums. Find out in advance if
you have this type of vanishing premium
policy and under what circumstances you'd
have to start paying premiums again.
(article from www.ehow.com) |
