Talking about life insurance can be difficult. It's a heavy topic in both its financial and emotional implications. After all, life insurance is about trying to protect the financial security of those who depend on you after you're gone.
Once you realize why having life insurance is important, the next step is actually purchasing it. While the process can seem overwhelming, these five tips can help make your life insurance purchase decisions easier.
1. Be proactive.
When you're first exploring life insurance, it can be a bit overwhelming. "But don't put yourself in a situation where you're trying to learn about life insurance at the same time that you're trying to decide what and how much to buy," suggests Scott Halliwell, a certified financial planner practitioner with USAA.
There isn't a one-size-fits-all life insurance policy. Ultimately, the policy that's best for you depends on your financial situation and goals with the coverage. The more prepared you are when you go into an insurance discussion, the better your odds are of getting a policy that's appropriate for you. "Even though all life insurance comes with a free-look period during which you can cancel the policy and get your money back, it's generally better for all involved if you get it right the first time," Halliwell says.
2. Do your homework.
Halliwell suggests using a life insurance calculator to help figure out how much insurance you may need.
Generally speaking, a calculator will look at what you owe, your survivors' expenses, how much you have saved, the goals you'd still like to fund, and -- sadly -- the cost of a funeral. "These calculators are simple to use, but they do some pretty complex calculations to help you determine how much coverage you need," Halliwell says.
The average face value of a policy was $163,000, according to recent numbers from the American Council of Life Insurers. But, some policies can be valued in the millions depending on the income of the purchaser and the family's needs. Shop around, but only buy what you can afford, recommends the National Association of Insurance Commissioners. If you can't make your premium payments, you may end up without any insurance.
3. Understand term versus permanent.
Once you've determined how much life insurance you need, it's time to figure out what type you should get.
Life insurance can be broken down into two broad categories: term and permanent. While they are often presented as a one-or-the-other choice, Halliwell suggests that it is better to look at them as complementary. "I personally have a combination of both term and permanent coverage, but every situation is different," Halliwell says.
Term life insurance should be used for specific goals -- ensuring your mortgage will get paid off or your children's college education will be funded. Some situations, however, may be better covered by permanent insurance: Providing for a special-needs child, replacing a survivor benefit option or insurance used as part of an estate plan.
Permanent life insurance will cost more initially, but typically will have a premium that doesn't change over time. These policies also build a cash value that can be used in the future to help offset the increasing cost of insurance, helping to keep your premiums from increasing. "If you purchase permanent life insurance, get an update every five years or so to see whether your financial assumptions are being met," Halliwell adds.
4. Don't put all of your eggs in your employer's basket.
It's easy to look at the group life insurance provided by your employer as a simple solution to the issue of life insurance. After all, you can sometimes get a certain amount of coverage for free, and can usually bump it up for relatively little.
It also has a big pitfall: If you lose your job, you could also lose your life insurance.
In other words, it's good to have it, but not rely on it. Another risk of having your insurance solely through your employer is that as time passes, it will likely become costlier to get a policy on your own. The younger you are when you first buy insurance, assuming you are healthy, the less expensive it is likely to be.
5. Be safe, not sorry.
If you have an expiring term policy or think you can find a better deal on life insurance today than when you purchased your current policy, do not cancel the one you have until the new one takes effect, the National Association of Insurance Commissioners says. The last thing you want to happen is to have a last-minute glitch or technicality hold up the new policy -- leaving you and those who depend on you unprotected.
"Getting the right amount and type of life insurance is a cornerstone of a solid financial plan," notes Halliwell. "Ultimately, what's best for you depends on your financial situation and goals with the coverage."
The most important thing is that you are taking steps to preserve the financial security of those who depend on you. Talk to a licensed life insurance representative to determine the best fit for your needs, your finances and your future.