For most people, the purpose of life insurance is to provide income for loved ones, pay off your mortgage and other debts, send kids to college or provide a retirement for your spouse. It can also be used to accumulate cash on a tax deferred basis. When considering the purchase of life insurance, it is best to look at your overall financial picture and the needs of your loved ones the insurance is meant to protect.
The first question many people have regards how much insurance they should purchase. There are various recommendations for how much insurance coverage to get, some say three to five times your current annual income, and some say six to eight times that amount. The amount you purchase depends on your personal situation.
Some factors to consider include other income sources your beneficiaries might have, the size of your family and the ages of your children, whether your spouse works and what his or her earning potential may be in the future, any other insurance policies you may have from a job or other activity, the amount of current and future debt you have such as mortgage debt and future college costs.
Because you have no way of knowing when your time will come, it is hard to get the number exactly right. That’s why it is a good idea to reevaluate your insurance needs every year or so. For example, when your children are young, it might be best to purchase more insurance to cover future college expenses. However as your children get older and finish college, you could reduce the amount of coverage you have since you will no longer be responsible for that cost.
If you want to accumulate money aside from what the face value of insurance policy will be, consider a whole life policy. This type of policy allows you to accumulate retirement income for your spouse. A whole life policy sets aside a portion of each payment you make and invests it in a stock, bond or money market fund. This forced savings will allow you to accumulate additional tax deferred savings with little effort on your part. The down side of a whole life policy is that it costs more than a term life policy and there are various commissions and investment costs built into the policy which reduce the investment return. If you have a retirement plan such as a 401k or individual retirement plan already, a whole life plan is probably unnecessary and you should go with a cheaper term life policy.