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Life insurance: Protect your family's financial future

What you need to know to ensure your loved ones are protected

Why you may need life insurance

Discussing life insurance is probably the last thing on your mind when you’re sitting at the dinner table with your family. However, it is an important discussion to have as it can be one of the best financial decisions you make to protect your loved ones.

If someone relies on you financially, you should consider purchasing life insurance -- this is particularly important if you are a homeowner with a mortgage. A recent study showed that half of the households in America would feel the financial impact from the loss of their primary wage earner.  To understand how much life insurance you need, ask yourself “What would be the impact to my loved ones if something were to happen to me?”

Determining the type of life insurance that you need

There are two major types of life insurance: Term life and whole or permanent life. Whole life or permanent life pays a death benefit whenever you die. Term life only pays if death occurs during the term of the policy. For this article, we will focus on the two different types of term life, term life and simplified term life:

  • Term Life.  Pays only if death occurs during the term of the policy, which is typically from 1 to 30 years. The most common terms are 15 years and 20 years. Generally, the premium for the policy is based on the insured person’s age and health at the policy’s start, and the premium remains the same for the length of the term. When it’s time for renewal, your age and health, will primarily affect the new premiums. Usually companies will not sell these policies to people over 70 years old.
  • Simplified Term Life.  The "simple" part means that no medical exam is required. It is important to note that simplified term life insurance policies generally cost more than traditional term life insurance for the amount of coverage one receives. In most cases, the whole application process can be done entirely online and you will only be required to answer a few questions that may affect your approval. The insured amount is usually not more than $250,000, and because there is no medical exam, the premium may be higher than term life insurance. 

Factors that can impact your insurance premium

Whether you choose to purchase term life or simplified term life insurance, these are some of the factors that may affect the amount you pay for your life insurance or whether or not you are approved for coverage:

  • Your age
  • The condition of your health
  • Whether or not you smoke
  • Risky activities
  • Your driving record
  • The type of policy that you choose

Common misconceptions about life insurance

1.  “The life insurance provided by my employer is all I need.” 

Many employers provide life insurance of only 1 to 2 times your annual salary or cap the amount of coverage at $50,000. Some employers will include an option to add more coverage at an additional cost. There are several potential drawbacks to consider with this type of coverage.

  • It only considers your base salary and does not include commissions and bonuses.
  • It may not be enough. Some experts recommend coverage up to 20 times your salary to cover your loved ones financially.
  • The policy is usually not tailored to your individual needs.

Since the policy normally cancels when you leave the job, you could be left unprotected. By the time you realize it, you might find that it is both harder and more expensive to get insurance because of your age or changes in your health status.

Talk to your financial planner about whether an employer-provided plan or a customized, privately-purchased plan – or a combination of both – is right for your situation.

2.  “I don’t need life insurance until I’m older.”

It actually makes more sense to purchase a life insurance policy when you’re younger, healthier, and don’t have other assets to pass on to your loved ones. Things to consider:

  • The longer you wait, the more likely the cost will go up because you are older.  You also take the chance your health status may change, making it difficult to qualify.
  • Even if you don’t have children, others may still depend on you. Consider aging family members who might otherwise have to pay for assistance.
  • If you have a student, car, or other type of loans, especially with a co-signer, consider buying a life insurance policy to cover the debt.

Now may be the right time to start discussing whether purchasing life insurance is the right choice for you and your loved ones. It is important to protect the ones around you that will be financially impacted if the unexpected happens.

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