Insurance is designed to help you cover an unlikely event that could be financially catastrophic. In the case of life insurance, you’re protecting your dependents from the loss of your future earnings. For example, a life insurance policy can pay your mortgage, college tuition, or even funeral costs so that your surviving dependents will be able to continue on with their goals and maintain their lifestyle.
Anyone like yourself who has someone counting on them for their financial welfare will likely need life insurance. Young families in particular have more debts and fewer financial assets, so life insurance is often critically important. Retirees with no debts and enough savings, on the other hand, may only need to consider life insurance for inheritance tax purposes.
And it’s not just the breadwinner that may need life insurance. While a stay-at-home parent or full-time homemaker may not bring in a income, they provide innumerable services that would cost thousands of euros to replace.
Life insurance needs evolve with time
Some families only need life insurance until the kids finish college and the mortgage is paid. Other families with a child who has special needs, may need insurance for a lifetime.
It’s important to understand that your life insurance needs will change over time. Make sure to review your coverage with any major life event like moving, the addition of a new family member, changing jobs, or buying a new home.
Zeroing in on the amount of insurance you need
One of your first decisions is how much life insurance you need, so it’s smart to begin your process with what is generally referred to as a “needs-based” analysis.
Start with a net worth statement, which is simply a list of all your assets and liabilities. Next you’ll want to review your income and expenses, and include any future liabilities (e.g., additional debts, college costs) and future financial resources (e.g., Social Welfare Survivor Benefits) that might come along.
Some individuals might also want to incorporate charitable, business, and other legacy goals, as the more complicated your situation is the more it makes sense to meet with a trusted financial advisor, insurance professional, and possibly an estate planning solicitor.
And in the final analysis, make sure the insurance fits within your budget as it doesn’t make sense to purchase a policy that you can’t afford.
Timing matters
It’s often better to buy life insurance sooner rather than later as life insurance is cheaper the younger and healthier you are and a big health change can make you uninsurable.
Understand the two main types of life insurance
The two main types of life insurance are term and whole of life. Term insurance covers you for a fixed period of time for example, 1, 10, 20 or 30 years. At the end of your chosen term, your cover will either finish or there will be and option to extend the cover by taking out a new term assurance policy. This type of cover is usually the most cost-effective.
Whole of Life insurance on the other hand, can be in-place for the whole of your life as long as enough premiums are paid to keep the policy in force. Also, you don’t have to choose one type of policy over the other as you can mix and match to get the cover you need.
Group vs individual policies
Group life insurance through work have limited underwriting, so for those who have worse than average health it could be a great solution but there may be conditions that causes the cover to cease on leaving employment. As such, if you are in better than average health it might be cheaper to purchase individual coverage that is customized to your specific needs.
While insurance isn’t the most exciting thing to think about, it should be viewed as an important component of every financial plan as it is designed to ensure the financial security of your family.
Source: By Carrie Schwab-Pomerantz, Schwab Moneywise
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