Whenever you purchase personal insurance, you enter into an agreement with the insurance company that pledges to give your beneficiaries a certain amount of money in the event of your death. To avail this security, you pay regular payments, known as premiums. Premium is calculated on the basis of various factors such as gender, age, medical records, and the amount of policy you are planning to purchase.
In the event of your death, your nominees can directly use the money provided by the insurance company for:
- Clearing your house debt
- Funding for a child’s education
- Covering your lost income
- Funeral and other expenses related to the funeral
Certain insurance policies even offer you benefits while you are still living. Let’s say; you take a permanent life cover which provides a cash value option, it can definitely be put to good use in your lifetime.
Types of Life Insurance
There are two types of life insurance:
Term insurance provides coverage to your dear ones for a limited period of time- generally from one to 20 years. However, when you stop paying the premiums, the insurance cease to exist. Also, term policies give benefits only in case death happens in the period covered by the insurance policy, but they don’t make any cash value for you.
The other type of life insurance is permanent insurance. This insurance does not expire; it always covers your dear ones as long as you pay timely premiums. There are some policies which even offer cash benefits.
How much life insurance do you think you need?
You should aim to create a policy or policies in a way so that in the unfortunate event of your death, your policy compensates for your shortfall of the economic contribution in your family expenses. Let me suggest a few ways to determine how much should you insure.
First, you calculate your replacement income need. This is the most used method of ascertaining the financial share you can estimate to make to your family, from your current life till you retire. In addition to replacing your income, it calculates everything you provide for your family including:
- Retirement saving and 401(k)
- All personal services you provide for your family such as cooking, child care, house maintenance and others.
- Other Benefits/health insurance
You can also remove your personal expenses, clothing, outings, personal expenses, entertainment, and all other expenses related to you.
Another way to assess your requirement by a survivor needs analysis
This approach is made with the idea of replacing a certain amount of money for your living spouse and kids to achieve a desired level of lifestyle even in your absence. You need to calculate the amount of money required for your family. Once you identify that, you will be able to know if you need to invest in some additional policy. You must contact an insurance professional to get a detailed estimate on your insurance. You can even opt for a custom insurance according to your requirements. You must pay special attention to the terms and conditions of the insurance policy.