The purchase of life insurance policy may be one of the most important financial decisions you will ever make. Decisions, a lot of people put off until someone in the circle of their family or friends dies. This is not surprising, because we all have an inborn self-defense system that prevents us from thinking about death. Unfortunately, postponing this sort of issues may be devastating for our family and business in the future.

To decide whether we need this type of insurance or not, and if we are able to afford it, we should ask ourselves three basic questions:

1. Do I need life insurance?
2. How much coverage do I need?
3. What kind of policy will suit my needs best?
   

Let us take a closer look at the questions:

Question Number One: Do I need life insurance?
The fastest and easiest answer: if someone is likely to suffer financial problems after our death, like our spouse, children or ageing parents – we do need life insurance.

Question Number Two: How much insurance do I need?
To calculate that, some experts recommend multiplying our annual salary by 5 to 10 times. However, this rule is too wide to be helpful.

The best way to estimate if we need a life insurance policy for $ 100,000, $ 200,000, $ 500,000 or more is to go to an agent who will do Financial Needs Analysis.

The analysis starts from gathering customer’s financial information. Then, we estimate how much money the family will need after the customer’s death to meet their financial obligations.

There are three types of expenses,

  1.    Immediate expenses:
         -  Funeral costs,
         -  Unpaid medical bills,
         -  Mortgage and other loans, e.g.: credit card debts,
         -  Taxes,
         -  Inheritance proceeding costs.

  2.    Permanent expenses
         Money needed to survive for a certain period of time
         -  Food,
         -  Rent,
         -  Media: electricity, gas, refuse disposal,
         -  Transport,
         -  Medical help,
         -  Clothes.

  3.    Expenses for education or savings retirement plan which can also be financed by life insurance policy. 

After we have evaluated our family’s financial needs, we should analyze other sources of income for our family’s survival. That is spouse’s earnings, joint savings and investments and of course other life insurance policies, if there are any.

A lot of people light-heartedly speak of selling the house as a way of securing spouse’s financial needs. Unfortunately, houses are not as saleable as they were 5-6 years ago and there are still bills to pay and the family still needs a place to live in. Therefore, the main reason to purchase life insurance is to fill the gap between our family’s financial needs and resources they have for maintaining the same economic lifestyle.

Question Number Three: What kind of policy will suit my needs best?
Choosing the type of policy, you need to consider two issues:

1. For how long do you need the insurance?
2. How much money do you have to pay for it?
   

The fact for how long we need the insurance can help estimate if we need term or permanent life insurance.

Term Life Insurance
Term life insurance can be purchased for a set number of years: five, ten, twenty or thirty. If we need insurance to pay off a 20 year mortgage – term life policy for 20 years is the right choice. If we are trying to secure our ageing parents’ proper lifestyle in case of our premature death – then we may consider purchasing term life coverage for 5 or 10 years. The shorter the policy period, the lower the premium.

To provide an example, term life policy for a 30-year old non-smoking woman, Chicago resident and in good health condition for $ 100,000 costs $140 and for a 40-year old woman $185.

When the fixed period of the policy passes, the policy becomes really expensive to maintain and you may be required to undergo physical examination. It means you must be healthy to qualify for further coverage. Poor health, hazardous occupation or extreme sports make life insurance premiums go up.

Permanent Life Insurance
As the name indicates, this coverage is for the whole life. This insurance’s rates are often the same for the whole life. You can also choose an option where you pay the premiums only until retirement, whereas the coverage remains active until the end of your life. Permanent life insurance gives us the chance to accumulate money and use it when we need it the most – in case of an emergency, investment chance or to pay for the child’s college.

All those benefits have their price. The initial price of such insurance is 3 to 10 times higher from the term life insurance premium with the same amount of coverage. Therefore, if your home budget is small, it is advisable to buy as much coverage as possible, even if it is term life insurance. However, if your resources allow you, you should consider having a permanent policy in your insurance program. When it comes to term life insurance you can turn it into a permanent one.

The worst mistake made by a lot of people is underestimating for how long they will need life insurance. Having two types of insurance mentioned earlier, makes us better prepared for all the surprises life can have for us.

Life Insurance for Businesses
Businesses also purchase life insurance. What is more, it is a recommended form of financing the risk that business activity creates. Insurance is a tool very often used by small and medium size businesses in USA for securing them in case of premature death of one of the owners. Company owners have an agreement that in case one of them dies, the money from life policy goes to the deceased’s beneficiaries, whereas his shares in the company to his partners. It often happens that in case of small companies one of the children gets the business and the other money from life insurance policy.

Life insurance policy protects us also from selling the business to meet our commitments with IRS.

No matter how hard it is to make preparations in case of our death, it is the only certain thing in our lives. Therefore, purchasing life insurance policy we can show our family that we care about their needs. We cannot soothe their pain after our death, but we are able to satisfy their financial needs so that they did not worry about paying off debts and future expenses.