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Buying life insurance can help financially protect your dependents after you pass away. Since premiums are partially based on your age, you may be able to lock in a low rate by buying life insurance now. You may want to buy life insurance if you want to provide for dependents, leave money to your dependents or pay final expenses. Let's explore these and other reasons for buying life insurance sooner rather than later.
1. Your Dependents Count on Your Income
The most important reason to purchase life insurance is to replace your income for dependents who rely on it. Your spouse or partner may use your life insurance to cover your mortgage, pay off your outstanding debts and help with childcare and other daily living expenses. Whether or not you're the sole income earner in your household, life insurance is important to have if your death would cause significant financial hardship for your loved ones.
2. You Want to Leave Money to Loved Ones
Life insurance can be used to leave an inheritance for your loved ones. In some cases your beneficiaries may not suffer without a life insurance payout when you pass, but would benefit greatly if you provided one. A life insurance payout may help a child cover large expenses like college tuition or a home down payment, for instance.
3. Pay Final Expenses
The median cost of a funeral with burial is $8,300, according to the National Funeral Directors Association. These expenses can be difficult for families to cover. Buying life insurance could save your loved ones from having to sell assets or take on debt to cover your burial and other end-of-life costs.
4. You Want to Keep Your Business Afloat
If you own a small business, buying life insurance may be essential to help business partners continue running the business without financial difficulty. The death benefit can be used to cover financial losses or transfer ownership to the remaining business partner(s).
5. To Leave a Legacy
You can use a life insurance policy to make a large, lump-sum donation to your favorite cause. In addition to helping those in need, donating your life insurance policy may provide tax benefits for your heirs.
Types of Life Insurance
There are two main types of insurance: term life and permanent life. Each provides different features and coverage lengths.
Term Life Insurance
Term life insurance provides financial protection for your family for a specified period, usually 10 to 30 years. Term life insurance pays a death benefit in the unfortunate event of your death during the policy's active period as long as you're up to date on premiums. Unlike other types of life insurance, term life insurance doesn't accumulate cash value.
Once the term expires, coverage ends unless the policy is renewed. If you choose to renew, note that your premium amount may change, particularly if the term was for a longer amount of time, such as 20 or 30 years. The renewal options available may be limited based on factors like your age and health.
Permanent Life Insurance
Unlike term life insurance, permanent life insurance provides coverage for your entire life (or up to age 99) as long as the premiums are paid. Permanent life insurance includes a savings component that builds cash value over time. The policyholder can access this cash value through a loan, withdrawal or by surrendering the policy.
There are two main types of permanent life insurance: whole life and universal life.
- Whole life: Whole life insurance comes with a fixed-rate savings feature that gradually accumulates cash value over time. The savings component contributes to the higher cost of whole life insurance compared to term policies. If your cash value grows equal to your death benefit before your passing, your insurer will terminate your policy and pay out the cash amount. Another distinctive feature of a whole life insurance is the ability to borrow from its cash value through a life insurance loan with no credit check.
- Universal life: Universal life insurance offers more flexibility, allowing you to adjust your premium and death benefit while the policy is active. Cash value in a universal life insurance policy is subject to a variable interest rate that may vary based on market conditions. While flexibility is a major feature of universal life insurance, changes to your premium could cause your policy to lapse early. If your monthly premium is lower than the policy cost, the difference is deducted from your cash value. Your policy could lapse if the cash value drops to zero.
How to Buy Life Insurance
- Determine which type of life insurance meets your needs. Decide whether you need coverage for a specific period of time or your entire life.
- Calculate how much life insurance you need. For example, if your policy will replace income for your dependents, consider your income, assets and debt.
- Get several quotes to compare. You can buy life insurance from an insurance company, agent or broker and may have to complete a medical exam for accurate pricing.
- Make your final selection and pay your first premium. You may also enable auto payments so your premium costs are automatically deducted from your bank account every month.
The Bottom Line
Life insurance can be purchased to limit the financial impact your loved ones experience after you pass away. It can also be used to create an inheritance for your heirs or to support your favorite causes.
Some insurance providers use a credit-based insurance score to set premiums. If you live in a state where this is allowed, improving a low credit score can decrease your life insurance cost. Consider checking your credit score to see where you stand before shopping for insurance.