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Term Life Insurance
Term life insurance is like renting an apartment. You have a term or period of time that you lease the apartment and after that term, the contract is void and you typically find a new place to live or must pay more to renew your lease. Like an apartment lease, term life insurance is for a specific period of time such as 5, 10, 20, or 30 years. The premium and death benefit are guaranteed for a specified term. After the term is up, you can either pay more to keep the policy in force or move to a new policy, which will usually cost more as you age. Since there is no cash value with a term policy, term insurance is usually the least expensive option.
Related Article: Tips to Purchasing Life Insurance
Permanent Life Insurance
Permanent life insurance is like buying a house. If you pay your mortgage and taxes, you can pay off your house and live in it for life or until you decide to sell. No one can take your house away from you as long as you are current on your mortgage payments and taxes. The same is true with permanent life insurance–as long as you pay your premiums, you will have life insurance for life. You will also build up cash value over time that you can access if you no longer need the insurance or want to take a cash withdrawal from the policy. Although permanent insurance is usually more expensive than term insurance, it never terminates as long as make your premium payments and there is enough cash value in the policy to keep it in force.
How Much Life Insurance Do I Need?
The amount of life insurance that is right for you and your family is not a number you can pull out of a hat. Some people think that 4 times their annual salary is enough, but the calculation is not that simple. You must consider factors such as how much you owe on your house, social security benefits, education expenses, retirement benefits, credit card and other debt.
Many people think that the life insurance they have through their employer is all they need and will last till retirement or death. It’s important to note that employer sponsored life insurance may end if you leave your job. It is common for people to make career changes at mid-life and find out that they can no longer afford or qualify for life insurance.
To determine how much life insurance you need, ask yourself these questions:
- How much do you owe on your home? Would your spouse be able to afford the mortgage without your income?
- How much total debt do you have besides your mortgage, including credit card, car loans, and other debt?
- If you have minor children, how much money have you set aside in a college fund? Is this amount enough to pay for your children’s college? If not, would your spouse be able to save for college without your income?
- Although death and life insurance is not something most people want to think about when they are young and healthy, the best time to lock-in good life insurance rates is when you are young and healthy. You might be surprised at how affordable peace-of- mind can be for you and your family.