Choosing the Best Term Insurance – A How-To Guide
There are so many types of life insurance policies, how are you to choose the best? Many things go into determining what is the best insurance policy for you and your family. Ultimately, you will need to talk with the broker who can understand the full depth of your financial situation to get sound advice. Here are a few things you may want to consider when looking and shopping for the best term insurance.
How Long Will You Need It?
When buying term insurance policies you need to consider when you will no longer need your policy. If your plan is to use your insurance to cover any gap created by an early and unexpected death, then you only need insurance until you reach the age of retirement. You may reach your financial goals prior to the age of retirement. There is no need to continue paying for life insurance if you can self insure. What I mean by self-insure, is that you can cover any major life expenses and leave your family well off if you were to suddenly die.
How Much Do You Need?
There are a number of rules of thumb to consider here. If the purpose of the policy is to cover your income if you were to die, then you can calculate how much insurance you need. For example, if you make $50,000 a year and feel comfortable that with a conservative investment you could average 10% a year, then you need $500,000 in term life insurance. Let me walk you through that. If you were to get $500,000 today and invest in a conservative account, would you make 10% a year? If so, then your yearly income from your investment would be $50,000. Do you see how this works?
What If I Stay Home?
This is a great question. How do you estimate the value of someone who stays home? If you are a care provider for your children, there is a monetary value necessary to replace that service. Do not get me wrong, I am not saying to replace you, but to replace the childcare services you provide. The safest way of doing this is to find out what childcare cost in your area. A general rule of thumb, is that $40,000 per year would likely be adequate for your needs.
That means you would need a $400,000 policy if you feel confident you can make 10% / year with it properly invested. This would provide $40,000 a year to pay for childcare.
What about Human Life Value?
Human life value is when insurance agents want you to buy more insurance than you need to replace your income. The value of this for them is that they receive a higher commission for selling higher policy value. The sales approach is to say that you should replace all that you would make if you had lived. If this is important to you, then by all means consider getting a larger policy. However, if this is just a security blanket, not an investment vehicle, then save the money each month and invest it in something else.