Getting term life insurance when you have a family is an important decision you need to make with a well thought-out plan. Organizing and anticipating your family's present and future needs will help you select the proper coverage for the policy. The following advice will help you through the considerations in choosing, buying, and setting up a term life insurance policy that is right for you, your spouse, and your children.
Do list what you want the insurance proceeds to do
Start with a list of all your debts. Include credit cards, car loans, medical bills and mortgage. What is your current annual earnings amount? How many years do you need to replace your wages and benefits for until the youngest child has graduated from high school or college? Now you have a beginning idea of what your term life insurance will need to cover. Add to this amount the increased costs as your children age and enter high school or college. Add any financial obligations to children or spouse of a first marriage plus money you had been giving to support disabled parents or siblings. Estimate potential funeral and estate settlement costs. Approaching the challenge in list fashion using some simple arithmetic to help you estimate a term life insurance amount that will help you meet the current and future financial needs of your family. Now you have a better idea of how much is “enough” coverage and more importantly, how much is not “enough”. I did not suggest you take off retirement account balances from the total because your spouse will need that money for retirement someday and you should plan to leave it alone.
Do determine who should own your life insurance
The personal estate tax exemption will reduce to one million dollars effective 1/1/2013. If you own a $1,500,000 life insurance policy on yourself, and you die in 2013, congratulations! Washington is thrilled at your generosity! Why? You just created at a minimum an unnecessary $275,000+ estate tax bill with the signing of your death certificate. Every dollar of assets in your estate will be taxed at 55% over the one million dollar threshold. Group life insurance counts towards this figure plus retirement accounts. Don’t waste any of your estate tax exemption by owning your own policy. Should your spouse or an Irrevocable Life Insurance Trust (ILIT) own it? What if you already own your own coverage? Ask a professional about your options to maximize the amount of the term insurance that will go to family and not the government.
Do designate primary and contingent beneficiaries
Naming only a primary beneficiary pays policy proceeds into your estate if the primary beneficiary dies at the same time or before you do. Proceeds in the estate are subject to creditor claims, estate settlement costs, delays in dispersal, perhaps estate taxes, attorney fees, etc. With no will the state you live in also decides who gets the money thats left. It’s important that you name contingent beneficiaries such as a trust for the benefit of minor age children. If you name a relative you assume will take care of the children with the money, understand as beneficiary upon receipt of the life insurance proceeds that is now their money to spend as they see fit. They are not required to use one penny of it on the children as you intended. It could also be subject to creditors claims and divorce asset divisions down the road.
Do consider using more than one guaranteed policy period
Splitting coverage into two or more policies saves money on premiums. How? Costs of a 30 year term policy are higher than 10 or 20 year level premium policies because guarantee periods are longer. A $1.5m need split into one $500k 10 year policy, one $500k 20 year policy and $500k in one 30 year policy reduces premium costs versus only one 30 year policy. Reducing coverage to secure a longer guarantee period when the reduced policy is insufficient to provide for survivors today is foolish. A multiple policy approach gives you flexibility to discontinue coverage as needed, or to convert coverage from term to permanent coverage due to insurability changes.
Do shop multiple companies’ offerings for best pricing
Experienced insurance brokers or independent agents shop the marketplace giving you easy access to the largest selection of products plus the benefit of their counsel. Pricing for males/females coupled with the difference in ages or face amounts needed for married couples often requires the use of two companies for lowest costs. Family dynamics also impact policy structuring.
Do not name minors as beneficiaries
Proceeds when paid will need to have fund guardianship set up via the courts. Proceeds may not be accessible to the caregivers you envisioned. An unprepared guardian could spend the funds. A child reaching legal age can do anything they want with the funds. So could their manipulative love interest with a bulls-eye on the balance. Predatory love interests disappear about the time the account balance is at zero. Set up a trust to assure your financial support wishes are carried out for their future. Many people do not understand trust framework, for these kinds of purposes can be in place to be set up and funded at your death with no money deposited in it until death of a parent or guardian occurs.
Do not think you are too young or too healthy
Obituaries are full of people who thought they had a lot of tomorrows to buy life insurance for “someday when they really needed it”. It’s easy to find obituaries ending with requests for donations for burials or college funds. Life insurance’s purpose is to create cash quickly for survivors to have their needs met when you die too soon.
Do not let a policy lapse for nonpayment of premiums
You procrastinated sending in the check for the premium due and the policy is worthless. Take five minutes to fill out a form to change the drafts to a new checking account and set up automatic withdrawals. Don’t cancel the policy for a little more spending money. Don’t assume you will get “some coverage at work” and never do. The result is the same: no life insurance was in force for survivors who needed it desperately and you died anyway.
Do not buy your coverage from an inexperienced agent
You may be pressured to help your friend or relative in this new part time job they are trying out. Lack of experience could cost your family a lot of money in the learning curve results. You become an “orphan policy owner” when they decide to quit. When you have policy questions thereafter call an 800 number. If you use an online resource are you talking to an order taker or an experienced agent who is there to help you on an ongoing basis?
Do not assume you are uninsurable due to pre-existing conditions
Having health challenges will not automatically eliminate you from being able to secure coverage. Conditions such as high blood pressure and diabetes are insurable. You may have to pay slightly more but that does not mean it is unavailable or unaffordable. Breast and prostate cancer survivors are very surprised to learn that they can often obtain coverage within the year after treatment has been completed without higher premiums. Tell your agent about past or current health issues so they will not waste time submitting your case to companies who will not make you an offer.
While life insurance is not a glamorous purchase that you can show off, it provides money for your family to carry on without you when it is needed most. It means your spouse is not working day and night juggling three jobs trying to make ends meet and/or maintain the lifestyle you worked so hard to create.
Choosing and buying term life insurance really takes minimal effort. Simply pick up the phone and call a licensed agent. Set up an appointment and meet with them. He or she can guide you through the process in a very timely manner.
You should view life insurance simply as an expense. Just like cable TV, gasoline, guitar lessons and groceries and you should review your coverage with your agent about every 3 to 5 years for changes in:
• Birth or adoption of children
• Health decline
• Newer product pricing
More expert advice about Life Insurance
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