Do You Need Life Insurance

If you are like many other people, you'll spend plenty of time worrying about whether you are saving enough for retirement and give relatively little thought to the issue of life insurance.

Life insurance often gets short shrift, partly because many people come at it with preconceived ideas, and that, according to advisors, results in some fairly common mistakes. Very often, people buy life insurance right after they get married or have their first child and don't give it another thought until their policies are set to expire.

One of the most common mistakes people make with regard to life insurance is assuming that their lives aren't going to change, and so they plan for a short time horizon on the insurance front. By midlife, many people are in the throes of raising children and paying off mortgages and may want higher levels of coverage but have difficulty getting it. Sometimes as we get older, we lose our insurability because we are no longer as healthy or we can only get the coverage we want at an exorbitant price.

The first issue to consider when it comes to life insurance is whether you need it at all. The answer to that question hinges in large part on whether your death would create a financial hardship for a surviving spouse and any children in terms of lost income.

If someone else depends on your stream of income, then it makes sense to consider life insurance.
One of the biggest mistakes some married couples make is insuring one partner, the primary breadwinner, and not the spouse who has stepped back from his or her career to take care of children. That can be a costly mistake if the stay-at-home parent dies, advisors say. Among other issues, the surviving parent may face much higher child-care expenses.

How To

So you've decided to buy life insurance. What now? The next step, advisors say, is to determine how much of a death benefit you really need. The death benefit is the amount that an insurer pays out to the designated beneficiaries of a policy if the owner of the policy dies.

Some advisors undertake an exhaustive needs-based analysis that takes a number of factors into account, such as how much it would take to pay off mortgages, send kids to college and replace lost income.

Those in the market for life insurance should also consider how long they'll need coverage, which will help them determine what type of policy to buy. Life insurance comes in two forms, term or permanent, although some policies are a combination of the two.

Term insurance provides coverage for a specific period of time, and the premiums are typically fixed during that period. Many experts say term insurance is the right choice for most people because you buy coverage for only as long as you need it, although that involves some guesswork.

"Change in health status is one of the more common reasons why someone would come to us and say, 'I think I need to change my short-term coverage to long-term coverage. We are going to look at what they have right now in terms of life insurance and what options their policies offers them in terms of conversion" to different types of policies or longer-term policies.

Permanent insurance includes universal and whole life. As the name implies, permanent insurance provides lifetime coverage. Often such policies build a cash value that their owners can access before death through loans or withdraws, much like tapping the equity in your home.

Not surprisingly, permanent insurance will typically end up costing you more than term insurance. It can also be complex and thus confusing to many consumers. What's more, some critics of permanent insurance argue that even policies that accumulate a cash value may represent mediocre long-term investments as compared to other options, such as mutual funds.