What is the best life insurance?
Who needs life insurance?
When do you need life insurance?
What are the types of insurance policies?
How much coverage do you need?
These are down-to-earth questions you can’t answer categorically and confidently when you lack financial education and do not have hands-on experience. You can actually achieve financial knowledge in your quest to become your own financial advisor.
Here are the basic steps you should take:
Step 1: Know the difference between two types of life insurance:
Term insurance or pure insurance coverage. As the name implies, it is pure insurance and has no saving or investment component. This is renewable annually or is purchased on a year-by-year basis.
Whole life insurance.This type comes with many variants but the key feature is it is term insurance plus investment product. Here you’ll pay premium much higher than the term insurance to cover the cost of the investment component. Normally, agents promote whole life insurance because it commands a higher commission. Whole life policies are built on assumptions over a future time which usually are not backed with hard facts.
Step 2: Know If You Need Life Insurance
The best life insurance is one which adequately fill your family's future needs. Not everyone needs insurance. Insurance is an investment, not an expense. It is instant money, a leverage money: for a small amount of money, you can “RENT” a big amount of money.
You do not need insurance of you have nothing to rent or if you have no income and no asset to protect. You do not need insurance if you have no dependents. The purpose of insurance is income replacement in case you, as breadwinner, will die and be able to leave money for your family.
You should be wary of agents who entice you of policies you can keep throughout your life. By the time your children are grown up and will be on their own, you don't need life insurance anymore.
Step 3 : Know How Much Insurance Coverage Do You Need
How much insurance is enough? How much income does your family need every year to cover their expenses until such time that they have fully adjusted to life without you. The rule of thumb is annual income multiplied by 10.
A complete needs analysis takes into consideration income replacement, debts and mortgages, medical needs and children’s education.The best life insurance you can get is based on thorough needs analysis and estimation.
Step 4: Know How to Buy Life Insurance
Buy term insurance only. Do not buy whole life insurance or whatever its variant. Do not buy insurance with an investment component. You manage your investment by yourself. Do not let the insurance company do it for you. Invest somewhere else such as in stocks or mutual funds.