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How To Choose The Policy That Fits You Best
Author David Schneider | May 23,2007
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For those who are only beginning to look into the many options of life insurance available to them, it is all too easy to get overwhelmed. Life insurance policies are offered in a broad array of different options. The bad news about this is that it's not easy to determine what's best for you. The good news is that, with so many variations on the market, with a little research you can find a policy that is tailor-made to your current needs and future goals. So, the best approach is to take things slowly and make educated choices at every turn.
Usually, the first component to focus on when looking at potential life insurance policies is the number of dependents you have. The rule of thumb is to buy enough life insurance so that, when combined with other sources of income, it will not only replace the income you currently generate for these dependents, but will also offer sufficient funds to offset any additional expenses incurred to replace services you provide. For example, if you are a lawyer who is able to handle your family's legal affairs, when you die they will need to hire outside representation at substantial cost.
Going deeper into the issue, you must identify all sources of “hidden income” that will no longer be in play when you're not around. “Hidden income” is financial assets you receive through your employment that fall outside the parameters of your actual wages. This would entail items like your health insurance premium and contributions to your 401(k) plan. Many people fail to consider these factors when choosing a life insurance policy, to the eventual detriment of their loved ones.
You may have heard the general guideline that dictates you should purchase life insurance equal to a certain multiple of your salary. This ratio varies quite a bit, depending on who is giving you the advice. It could be anywhere from 10 to 30 times what you earn as your salary before taxes. You should realize that this approach fails to consider inflation, and assumes that an investment strategy would yield the same rate of return year after year. Obviously, this is a theoretical rather than practical model.
Therefore, it's better to realistically determine how much money your family will need at your death to meet immediate obligations, and how much future income they will require to protect themselves. You can find a number of free calculators online to use to make these estimations. Only by taking into account both the obvious and hidden sources of income (as well as the myriad costs associated with passing away) will you have the ability to create a policy that you can truly say is a good fit. Just be sure to go about the process with someone you trust who has a deep professional understanding on life insurance issues. Don't hesitate to ask as many questions as you can think of. There's too much potential risk at stake when you choose a policy that doesn't faithfully meet your specific needs. |
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