saving for retirement

A recent study found that just over half of Americans have a life insurance policy, but of those with life insurance, a full third of policyholders do not fully understand their life insurance policy. Because life insurance is so important, you should take the time to make sure you have the right level of insurance and understand how it fits into your finances. Follow along to demystify some common misconceptions and get clarity on what to look for in life insurance.

What people think about life insurance

According to the life insurance survey from LendEDU, 54% of Americans own a life insurance policy. That is just over half of the people in the US. But what was most eye-opening was that of those with life insurnace, 33% said they do not fully understand their life insurance policy. There are not many things I can think of where people pay every month and don’t know what they are getting in return. Insurance is often confusing, but it doesn’t have to be.

The survey also found that of the just less than half of people without this insurance, over half plan to get insurance in the future and 44% said they don’t have insurance today because they can’t afford it. In a world where most Americans don’t have enough savings to cover a typical emergency, that isn’t shocking. But life insurance is often more affordable than people realize.

Term versus whole life for entrepreneurs

One of the biggest issues with life insurance is that there are multiple types, and not all insurance is created equal. The kind of life insurance that makes sense for most people is term life insurance. With term life, you pay a relatively low monthly fee in exchange for a lump payment if the insured were to pass away. This is called the death benefit. Yes, that is a bit morbid. But we are all going to die someday.

Whole life and similar policies like universal life and “investment grade” life insurance fall into a different category. Where term life insurance isn’t worth much, if anything, at the end of your policy, whole life grows in value each month as you pay for insurance. But when you compare the monthly cost, whole life is often multiple times the cost of term life. And when you compare the investment growth of whole life to what you get in the stock market, whole life rarely makes sense.

For most people, insurance and investments should be separate. Invest in your investment accounts and pay a monthly fee for term life insurance. You’ll generally be far better off with this approach, and it makes the monthly payments a lot more affordable.

Aspects of the best life insurance policies

For your life insurance, it is important to pick a policy that best aligns with your unique needs. Each family has different finances, and there is no exact right or wrong answer. But there are some guidelines you can follow to make sure you choose the best policy for your family. Consider this when evaluating your current or new life insurance options:

-The right policy value – Too much life insurance is a waste of money, but too little is a huge risk. To estimate your insurance needs, multiply your annual expenses by 10. If you live on $50,000 per year, for example, you should have at least $500,000 in insurance.

-A quality insurer – AM Best releases financial stability ratings for American insurance companies. Make sure your insurer can actually pay should your family make a claim.

-Portability – Group life insurance from an employer may be cheap, but you usually can’t take it with you when changing jobs. You should have an insurance policy you can keep no matter where you work.

-Understandable – You shouldn’t need an MBA to understand how your policy works. Your insurance agent or insurer should be able to explain it simply in a way you comprehend.

Of course, you should do a little research before signing up for any life insurance policy.

Don’t leave your family’s future to chance

While no one likes to think about dying, it is a fact of life. With the right insurance, you can rest easy that your family will be covered in the event of a worst case scenario. It is too important to ignore and often more affordable than most people realize. With the right term life insurance policy in place, you can find the right balance of affordability and value to meet your family’s needs. That is what life insurance is all about.

Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer originally from Denver, Colorado living in Ventura, California. When away from the keyboard, Eric he enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and baby girl. You can connect with him at his own finance blog Personal Profitability.

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