Life insurance is most common for estate planning, but it is not necessary for some people. It is a handy source of income, especially for people who have kids, parents, or a disabled person dependent on them. Even for people without spouses and kids, life insurance is used for paying off debts for the deceased owner, catering for their funeral expenses or even paying off taxes.
What is Life Insurance?
Life insurance is a valuable resource that helps protect your loved ones after your death. It pays for your funeral and burial cost, leaves your loved ones an inheritance, and can pay any remaining debt like medical expenses. Before buying a policy, it’s important to understand how different laws affect can affect life insurance. Insurance companies are regulated by state laws, but some plans such as employer-sponsored plans are regulated by federal laws.
Also, some states are community property states, which means that both spouses own an equal share of the life insurance if it’s acquired during the marriage. If you’re married and trying to get life insurance, you won’t have to worry about your income being used to determine premiums. So, regardless of how much you earn, in most states age and gender will determine your premium.
When You Don’t Need Life Insurance
While life insurance is important, not everyone needs it. For instance, you are single and probably don’t plan on getting a partner or a child soon, you may not need a life insurance policy.
Also, you may not need it if both you and your spouse are working and can both sustain yourself financially. These are some of the obvious reasons you won’t need a life insurance policy. Before buying an insurance policy, check with an expert first to help you gauge your situation and see if it will be necessary.
When You Need It
Some of the common instances you may need life insurance include:
If You Have a Child
If you have a child or children, then you may need life insurance. It is a way to sustain their living when you pass away. There are many factors that will determine the kind of life insurance policy you will choose. For instance, the amount of money your dependents will need for their expenses.
You will also have to consider the time it will take for your children to become self-sufficient. At the time of securing the insurance, is your child an infant or is he/she in school? For obvious reasons, a small child may need more income from the policy as compared to one who is in college. This way, it will be easy to choose an insurance policy that will sustain them all through until they can take care of themselves.
If You Have a Dependent
According to life insurance website, CFAinsure, dependents are the top reason people get life insurance. Dependents can be different, it can be your spouse or parents. You may also need life insurance if your partner depends on your income. The last thing you want is to leave your partner stranded with finances after you die. If your spouse solely depends on your income to sustain his/her lifestyle, you need to think about how they will survive in the event of your death.
Also, you may need a life insurance policy to help pay off your spouse’s debt. Your spouse can place the insurance policy as collateral for their loan and use it to pay off the debt.
Your parents may also be dependents of your income. If so, securing a life insurance policy will help fund their needs if and when you die.
To Sustain a Business
If you own a business, then you need to think about the life of your business after you die. Do you have dependents who will take over the business after you? If so, will there be enough funds to sustain the business? Also, you may not have a dependent to take over the business, but instead, you would wish for the business to be sold. It may not be easy to get a buyer immediately after your demise, so you need to find ways to sustain it until it gets a new owner. You can secure a life insurance policy as a means of funding your business after you pass away.
Life Insurance Mistakes to Avoid
Life insurance coverage has become the most significant component of an individual’s monetary plan. There’s a lot of misconception about a life insurance policy, primarily due to the way life insurance coverage products have been offered through the years in the USA. With access to quick life insurance quotes just a click away, it’s important to avoid some common life insurance mistakes. Here are a few common mistakes insurance coverage buyers should steer clear of while buying insurance plans.
Not Leaving Your Family $1M
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Underestimating Insurance Coverage Requirement
Many life insurance coverage buyers opt for their insurance policy covers, or sum assured, in line with the plans their agents recycle for cash and how much premium they are able to pay for. This is a drastically wrong way.
Your insurance coverage requirement is a function of your financial plans, and it has practically nothing to do with exactly what services are available. Many insurance coverage buyers use thumb rules such as ten times annual income to cover. Several financial agents say that coverage of ten times your annual earnings is enough because it gives your family members ten years’ worth of earnings when you’re gone. However, this is not generally correct.
Choosing the Least Expensive Coverage
Many insurance coverage buyers plan to buy insurance policies that are less costly like Bestow. This is actually another critical mistake. A low-cost coverage isn’t good if the insurance provider for some reason or any other can’t carry out the claim in case of an unforeseen death.
Even if the insurance provider fulfills the claim if it has a long time to finish the claim it is definitely not a suitable scenario for family members with the coverage to be in.
Treating Life Insurance Coverage as An Investment and Buying the Wrong Coverage
The most popular mistaken belief about life insurance coverage is that it’s also a good financial commitment or old age planning solution. This particular false impression is basically due to a few insurance policy agents who like to promote high-priced plans to earn high profits.
If you compare and contrast returns from life insurance coverage to some other investment alternatives, it just doesn’t sound right as a financial commitment.
Buying Insurance Coverage When It Comes to Tax Planning
For several years agents have inveigled their customers into buying insurance coverage to save taxes under Section 80C of the Tax Act. Investors ought to understand that insurance coverage is most likely the most detrimental tax-saving financial commitment.
Return from an insurance coverage is incorporated in the range of 4 – 6%, while Public Provident Fund, another 80C, provides around 9% risk-free and tax-free returns.
Giving Up Life Insurance Coverage or Withdrawing from it Before Maturation
This is actually an acute mistake and jeopardizes the economic security of the family in the eventuality of an unfortunate event. Life Insurance Coverage shouldn’t be dealt with until the unfortunate demise of the insured occurs. Some policy owners give up their coverage to meet a sudden financial need, with the expectation of buying any new American Insurance plan while their financial predicament improves.
Such policy owners need to keep in mind a couple of things. First, death isn’t in anyone’s command. Second, it at least helps your family members later with their financial situations.
Does Your Medical Insurance Carrier Play a Role?
Your medical insurance carrier can play a role in getting life insurance. For example, if you qualify for Medicaid, you’re typically capped at $2,000 in a number of assets you can have, including life insurance.
The good news is that some states have higher asset limits. Also, if you purchase a life insurance policy and you’re not able to make the monthly premium payment, there are consumer protection laws that prevent your policy from being canceled due to missed payments.
The Bottom Line
Life insurance applies in different ways to different people. If you assess your situation and find the need for a life insurance policy, then the earlier you start the better. Furthermore, insurance policies get more expensive as you age so the younger you start the more advantage you will be.