SHOPPING FOR LIFE INSURANCE
To shop for life insurance, you should perform the following steps: A. Start to research companies and policies. You could know the financial ratings of all insurance companies in the A. M. Best Company at www.ambest.com. In business for over one hundred years, A. M. Best sets the standard for insurance company ratings worldwide. Check with the Board of Insurance for your state to see any complaints that have been filed against the companies in which you are interested. You can determine how the companies handled the complaints and if the issues were resolved satisfactorily. B. Narrow down your list to three companies and get quotes.
Once you have chosen three life insurance companies, obtain price quotes on the types of life insurance policies in which you are interested. As different companies will charge different premiums for the same amount of insurance coverage, it is wise to comparison shop. An insurance agent can help you compare policies to see what is available. C. Choose your payout option carefully. There are a number of different payout options for your benefits once you have passed away. Check to make sure that the payout option you select will help your family meet their needs and accomplish all of their goals if you were to die suddenly. D. Calculate realistically how much your family will need. While you are shopping around, the first key question will be how much life insurance you need.
You must know…
Several online calculators offer assistance in determining this information. Look at some of the following websites: Smart Money, Yahoo Finance and Cash Money Life to explore various methods to calculate your life insurance needs. Here is one simplified method that provides a conservative estimate of the amount of life insurance you need. The following example assumes you have passed away and left a spouse who works and will be able to care for him/herself through working. You are also leaving behind one ten-year-old child who will need to be raised to adulthood. This example also assumes your spouse will be 100 percent responsible for their own retirement, other than what you have already saved before your passing. Calculate how many more years your spouse will need your salary to live on.
For this example, you have one ten-year-old child. Thus, your spouse will need your current income for eight more years until the child reaches adulthood.
1. Start with your salary.
In this scenario, let us assume that your income is currently $40,000 annually. Your spouse will, therefore, need $320,000 ($40,000 x 8 years) until your child goes to college and/or starts assuming more of their own financial responsibility.
2. Add education costs.
Include an amount for your child’s education. In this example, let’s use $50,000 as a minimum amount required for four years of college, which brings the total needed to $370,000.
3. Add your mortgage.
If you want your wife for exemple to be able to pay off the mortgage after your death, then add in what you owe on it. For this scenario, let’s say you owe $60,000. The total you need so far is $430,000.
4. Add funeral costs.
Add in $6,000 for your funeral costs, the minimum for what will be needed. Now, you are up to $436,000 in funds that your spouse will need. You may still have other assets to subtract from this amount to determine the amount of life insurance needed, but this is the most basic level of life insurance that you should carry if you are concerned about how your family will be able to manage once you have passed away.
5. Consider other assets.
In the event of your untimely death, your spouse will also have some assets. a. Subtract Social Security payments. Your spouse might receive Social Security Survivor Benefits for your child for the next eight years. Let’s assume they will receive $12,000 per year in benefits. Multiply that amount times the eight years your spouse will need to provide support for your child, which comes to $96,000. Subtract that amount from the above total of $436,000, which leaves $340,000. Don’t assume that this money will be available immediately, or even be that much. b. Subtract savings. Next, subtract from the balance how much you have already saved for retirement or other reasons.
Let’s say you have saved $30,000 in your six-month emergency living fund and another $70,000 toward retirement, totaling $100,000. You have then arrived at the total balance needed for life insurance: $240,000. You have a lot of leeway in computing your life insurance figure if your spouse currently works full-time. If your spouse is employed, you can probably assume they will continue working after your death. Maybe they wouldn’t need your entire annual salary while the child is growing up. In this case, you can simply reduce the yearly amount calculated. On the other hand, they might need more because there will be many things you will no longer provide physically or financially. If you have more than the one child calculated in this scenario, you will need to help plan for them as well.
They will get social security benefits for a time, but they might also want to go to a good college, which can mean much more money needed than the $50,000 calculated in this scenario. Keep in mind that as you age, your life insurance needs will change because as your children get older, you will likely accumulate more money and retirement funds savings. Plus, less money is required to help your surviving spouse raise children that are ages 13 and 15 years, than two and five years of age. On the other hand, you may acquire a mortgage or other important debts that you didn’t have when the children were younger. The health of your family members can also change and require a higher amount of life insurance. Also, if you leave behind large medical bills for your final expenses, these will also need to be paid by your family. Therefore, the scenario we used in the example can help you determine the basic minimum you would need to protect your family. Your insurance agent can help you come up with a figure that makes you feel secure and fits into your budget and financial plan. As many insurance agents say, after having delivered many beneficiary checks to the widows of their clients: “I never met a widow who thought she got too much.” Unfortunately, though, too many die without adequately protecting their loved ones. Things tend to cost a lot more than we ever calculate. Plus, your family will already be in severe distress at losing you. It will be even worse for them to face financial hardship in addition to bereavement. So let’s take a look now at the types of life insurance that are available for you to consider.