Buying life insurance for the first time can be overwhelming. Knowing your individual need for life insurance, the types of policies that are available, and how much money your family may need are all factors that will determine what type of policy you want to purchase, how much you’ll need to purchase, and even if you need to purchase life insurance at all.
Understanding your needs
A very common mistake is purchasing a policy just because it was recommended. The fact is, everyone has different financial needs, and therefore just because a certain policy works for someone, doesn’t necessarily mean it’ll work for you – you may not even need life insurance at all. The purpose of life insurance is to provide your family with financial support as if you’re no longer around to do so. If you don’t have any dependents, you probably don’t need to spend much (or anything) on life insurance. However if you’re contributing significantly to the financial well-being of someone (spouse, children, elderly dependent), you want to ensure that they’re taken care of in the event that you’re no longer around.
Understanding the policy you need
There are two basic types of life insurance policies: life and whole life. Term life insurance policies last for a specific period of time. It is less expensive than whole life as it usually expires before the benefits are used. Whole life insurance lasts from the day you purchase the policy until the day you die, no matter what. Whole life insurance is much more expensive, because the coverage could last several decades. Depending on whether you feel you need life insurance coverage for a specific period of your life or for your entire life will decide which type of policy best fits your needs.
Know how much to buy
To figure out how much life insurance you’ll need to buy, you need to understand the potential financial needs of your beneficiaries. Don’t follow any “rule of thumb” guidelines because, again, not everyone’s financial needs are the same. To calculate how much money your dependents will need, you need to figure out the number of years of support each dependent requires, and the amount each dependent would need per year. Add those up, and you have a good idea of how much life insurance you should be purchasing.