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Life InsuranceLife insurance is a way for you to affordably provide finances for your surviving spouse, ageing parents, children, and others if you pass away while they are depending on you.  Proceeds from your life insurance can provide extra income for whatever needs your loved ones may have: pay a mortgage, pay credit cards, college tuition, etc.

You can also use life insurance as part of any business succession planning or estate planning goals.

How to Calculate Life Insurance

Knowing how much life insurance to get is often a question that many people do not know the answer to.  A simple method to calculate how much you may need is to multiply your annual income that you want your loved one to be receiving each year and how many years you want to provide that income.  For example, if you want to replace $50,000 per year for twenty years, then you need a policy of $1 million ($50,000 x 20 years).

One consideration to take into account is whether the individual who will receive your life insurance proceeds will provide any independent income.  This may decrease the policy or allow the proceeds to last longer.  Other considerations may include college tuition or other expenses.  These may either increase or decrease the amount that will be paid out.  This amount is also called a “death benefit” or the “face value” of the policy.

Kinds of Life Insurance

To put it simply, there are two kinds of life insurance: term and permanent.

Term life insurance is probably the most well-known form of life insurance.  You get a policy, and it then provide you with coverage for a certain period of time.  Generally, these terms are for twenty or thirty years.  You could compare this kind of insurance with car or home insurance.  It is a good idea to have, but there is no guarantee that you will actually receive any benefits from the policy.  You would have to pass away within the term period to receive any death benefit.  Term insurance is also the cheapest form of insurance, and is cheaper the younger and healthier you are.  Because of this, it is a good idea to use this insurance strategically and not rely solely on it.  Term life insurance is a popular choice for young families.

By contract, permanent life insurance does not expire at the end of a term.  As long as you continue to make the payments, permanent life insurance will continue until you pass away, when it will pay out the proceeds.  There is a wide variety of these policies, with different premiums, cash value, fees, and death benefits.  For those policies that create cash value, you can borrow from the policy and use for your goals.  I would recommend that you meet with a licensed financial professional who is experienced and knowledgeable in permanent life insurance policies to decide which policy is best for you.

Final Thoughts

Life insurance policies are a powerful tool.  They can be used to provide income during retirement, for extra income, or pass on wealth to loved ones.  However, you should not break the bank for life insurance.  Life is full of too many needs and moving parts to invest too much money into one thing.  The amount of the policy’s monthly premium payment will depend on the face value, what kind of insurance you have, and your age and health, and how much income you wish to replace.  If you cannot yet afford to replace the amount of income that you want, be patient, get some life insurance that you can afford, and you can buy more insurance later.