Life insurance is a strong foundation of one’s personal accounts. It is considered by many as part of their life financing strategies, but is very easy for people to be confused about their life insurance. This might be due to how complex it is, as well as people having the completely natural urge to establish some psychological distance between them and the painful thought of their death. Regardless, many do understand that life insurance is something to think about, and if that describes you then here are 5 things you need to know that might clear up some confusion.
Dependents are people that rely on you financially. These include children or unemployed spouses, but can also mean an ex-spouse if you have alimony or equivalent payments, parents, siblings, employees or business partners. If you have dependents, you should really get life insurance.
How can they calculate how much your life is worth?
Life insurance isn’t a payment that’s related to how much the insurance companies think your life is worth, though many think it is. Life insurance is to help the financial consequences of a sudden loss of life and can help cover debts and funeral expenses etc. It is to lessen the stress of the dependents, which will already be high due to grieving.
What exactly is a policy?
Life insurance is essentially a contractual agreement. You pay the company a premium (set amount) every month or year for them to take care of your family in the event of your death. This contract is known as a policy. Policies can vary, the largest variation between policies is the difference between term vs. permanent insurance.
So is life insurance an investment?
Life insurance isn’t technically an investment. It shouldn’t be thought of that way as there are better ways of investing your money, but also because your investments may be taxed after your death, whereas your life insurance pay-out will not be. Some life insurances have an investment component that can offer some sort of tax privilege, but this can be extremely expensive. If you’re a healthy 30-year-old who doesn’t smoke, you might pay about $450-500 a year for a million dollar pay out. If you want an investment component and additional benefits, this number will be multiplied by ten.
Isn’t it Hard to Work out the Optimal Policy?
It’s actually surprisingly simple to work out the policy you should take if you implement a rudimentary strategy. Multiply your income by 15 and then purchase a policy with a benefit of about that magnitude. 15 times is about the number that recreates three quarters of the amount that they would have got if they had invested 5% throughout their lives. If you make $50,000 a year, that means you should be looking for a benefit that pays out $750,000 to your family and friends. If you had $750,000 in the bank with 5% interest, you’d be getting $37500 annually.
Hopefully this has cleared up a little confusion that you might have had about the tricky world of life insurance.