Life insurance is one of the best ways to provide financial security and stability for your loved ones when they need it the most. It’s something that every individual should consider in their lifetime. In fact, 85% of people agree that they need life insurance, but only 62% actually have it. Before you go out to buy a life insurance policy, make sure to do your research, discuss your plans with your family, and ask yourself the following questions.
What is life insurance?
The first step in buying life insurance is to understand what it is and how it can benefit you and your family. Life insurance is a form of financial protection primarily used to support those who may depend on your income. In other words, it is meant to protect your loved ones from the hardship caused by a premature death.
What are my insurance needs?
Before buying a life insurance policy, you will want to assess your insurance needs. Just as you examine a patient’s symptoms, medical history, and prescription use, you will need to examine every aspect of your current financial situation. Are you in debt? What are your monthly expenses? How many people depend on your income? How much will your funeral cost? These are important financial questions to ask yourself when buying life insurance for the first time, so that you can make an informed decision about your family’s financial future.
Why should I buy life insurance?
Most people are aware of the importance of having life insurance in their back pocket if the unfortunate were to happen. But why? According to LIMRA’s Household Trend report, 70% of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if they were to lose the breadwinner of their family. Life insurance helps replace lost income but you may also need it if:
- You are carrying a significant amount of debt (student loans, credit cards, etc.)
- Your aging parents are ill and require financial assistance
- You recently bought a house and have a mortgage
- You plan on starting or expanding your family
- You intend on providing for your child’s education through college
- You contribute to a charity
- You own a private practice
Keep in mind that the younger and healthier you are, the lower your premium will be.
How much do I need?
This is one of the most important questions to ask in your search for the right life insurance policy. While there are numerous online calculators that can help you determine your needs, there is no magic number. An outdated industry rule of thumb for calculating your insurance needs is to multiply your salary by 10. But that still may not be enough. Your needs will differ from another family physician’s needs which is why you’ll have to take into account your family’s lifestyle and spending habits, your income and how long your income will need to be replaced.
Start by calculating the monthly expenses your family will incur after your death. You should include funeral costs which can range from $8,000 to over $10,000, in addition to unpaid medical bills and ongoing expenses such as mortgage, utilities, and tuition. If calculating these costs becomes too overwhelming, you can seek the advice of a trusted financial advisor who will assess your needs based on your specific situation.
How long do I need to be insured?
Your life insurance policy should last as long you think it can support your family. Determine how long your children will require financial support and how long it will take your family to pay off the mortgage and other outstanding debts. You can purchase a policy for as little as five years and for as long as 30 years. Just remember, the amount of life insurance you will need can increase and decrease during your lifetime.
Which type should I get?
There are two main types of life insurance: term life and whole life insurance.
Term insurance is generally more affordable and is designed to provide coverage for a specified period of time. The younger you are when you buy this coverage, the more premium you will save. Your premium rate will increase as you age and there is more potential for a health issue to cause your rate to increase.
Whole life insurance on the other hand has a higher initial premium, but lasts for your lifetime. It also has the ability to build cash value. This policy generally guarantees coverage from the day you purchase it until you pass away. Keep in mind that permanent life insurance may not suit your needs if your family becomes financially independent. Look for a policy that comes with a convertibility clause that will allow you to convert to a term life policy if any life changes occur.
Having enough life insurance in place will give your family peace of mind and the financial protection they deserve in your absence. Don’t risk leaving your loved ones in financial jeopardy. For more information on the types of life insurance the AAFP Insurance Program has to offer to family physicians, click here.