You’re thinking about buying life insurance. Maybe you heard an ad for it. Maybe you have a business reason for it. You might have been discussing it with a friend. Life insurance is a tricky thing, however, and it is one of those products that you should only buy if you need it. Here are three real reasons why you should buy life insurance.
You just had children
Children are a blessing but also a huge responsibility. As a new parent you’re also discovering they are something else: a huge expense. Raising a child to adulthood can be a costly prospect. You’re committed to providing for your family, of course, but if you are not around to earn a paycheck that commitment might go unmet.
Life insurance can fulfill your promise to care for your family. Life insurance proceeds, if properly configured, can arrive in your family’s bank account quickly and with no tax burden at all.
An important tip is to only buy the right amount of coverage. Buy too little and your family’s needs may not be properly handled. Buy too much and you will overpay. To avoid that problem use a life insurance needs calculator. They’re easy to use and understand while avoiding the touch of a commissioned sales rep. They should look like this excellent online tool at Canada Life and address your needs while taking your current assets into account.
You just got a bank loan
If you took out a loan from a bank, and that loan is of noteworthy size, the bank may require you to carry a life insurance policy for the life of the loan. This is true in most industrial nations. Even the United States government’s Small Business Association loan policy includes clauses about it. This is because lenders are for-profit institutions and want assurance that loans will be repaid.
If getting life insurance is a condition of the terms of a loan then it is no longer an option – it’s a business requirement. Find a good term life insurance policy in the amount of the loan as a starting point. It will be the least expensive option.
In many cases you can save money by requesting a special kind of insurance called declining term, which reduces in face value with the passage of time. Since the risk to the insurer drops with time the premium will also drop. Simply configure the face value to decline at the same rate as your loan’s amortization table (the document showing how much money is left on the loan, which your lender can provide.
You want to leave a financial legacy
If you are reaching your golden years you may begin to have thoughts about your legacy – what you leave behind when you are gone. Legacy can take many forms, and many of them have a financial component. Life insurance can be used to create legacy funds, or to multiply the value of existing funds.
Creating legacy funds is a simple matter. All you need to do is take out a permanent life insurance policy in the amount you wish to leave behind after your passing. Depending on where you live the least costly version of this type of insurance is called guaranteed no-lapse universal life insurance. It costs less than other forms of permanent life insurance, carries less risk, and still lasts for your remaining lifetime. The proceeds will create a tax-free contribution to family members, charities, or any other cause you choose.
Multiplying legacy funds works in the same way with one important difference: you contribute a specific amount of money at the beginning to pre-fund the policy. An up-front cash contribution purchases what are called paid-up additions to the policy. They increase the face value. In many cases you can buy a fully-paid policy with the up-front funds, leaving no monthly premium to be paid at all. In other words, if you saved X amount of money to pass on, consider using it to buy a paid-up policy. The death benefit that pre-payment will buy is typically several times more than the initial payment. The recipients will get much more than the original payment – and it will be tax free.
Points to remember
Life insurance is a product you should only buy if you need it. If you need it you should make sure to buy the proper amount. Proper amounts are determined objectively through computation tools. Speak with a tax specialist or estate attorney to make sure your insurance policy is set up to get best use of its tax benefits. When you keep those tips in mind you will get the right policy, amount, and price.