Navigating life insurance can be complicated, to say the least. Much life insurance is vaguely worded, making it difficult to understand final expenses and death benefits to a spouse, beneficiary, or other dependents, as well as how funeral expenses such as a burial and other financial needs are handled. With any life insurance policy, the premium is a large component. If you’ve recently acquired life insurance and are wondering about your interest rate or how it could impact your annual income, there are a few key things to keep in mind.
Determining a coverage amount
One of the biggest factors in your life insurance premium is the coverage amount. Some sites offer a calculator (sometimes called a term life insurance calculator) to help you determine coverage and premiums based on your input surrounding individual circumstances. Other factors to your overall coverage amount include existing personal loans or student loans, the number of dependents and beneficiaries, your family’s needs, and even your life expectancy. Other factors may include ongoing Social Security income, real estate investments, and liquid assets. The amount of coverage will vary from person to person, so the first step is often to discuss the premiums with a financial advisor or insurance agent.
Typically, your life insurance need is something you should determine sooner rather than later. Since life insurance is often a long-term investment and life expectancy is so difficult to forecast, it’s hard to understand how life insurance coverage and premiums may be affected. If you’re depending on your life insurance payout only lasting for a specific period of time, a life insurance calculator may not be able to provide an accurate determination of how your premiums could change.
Why premiums change
While life insurance coverage is an excellent way to ensure your spouse, dependents, and children are protected and maintain their standard of living, you also need to understand how it can impact your finances and how premiums can increase. Frequently, it depends upon the life insurance products you’ve selected. It differs greatly from a personal loan in that you’re, in a sense, paying into it over time. While the type of insurance matters, it’s also important to determine whether or not you go for the best rate at the outset or invest in a savings plan that remains level over time.
Level term life policies start at a designated premium and remain at that level. Depending on inflation, your life insurance need may change over time, which could multiply the amount you spend on your policy. In contrast, a stepped term life insurance policy starts at a lower rate and increases over time. As a result, it’s easier to secure coverage, but it can affect your overall rate of return in the long run. While neither should affect your credit score in the way a home equity loan, auto loan, or personal loan might, your credit is also important to discuss with a financial advisor.
It’s also important to talk to a financial advisor if your life insurance is to act as an income replacement for your dependents. Outstanding credit card balances, auto loans, and personal loans can impact your life insurance policy unless you name the credit card company or loan holder as a beneficiary of your policy. If these matters aren’t settled before the life insurance is paid out, it could have negative repercussions for dependents.
Using an insurance calculator
While meeting with a financial advisor can be incredibly beneficial, there are some steps you can take on your own. Using a calculator is one of the easiest ways to compare premiums, determine coverage amounts, and select the right policy. To get started, calculate your life insurance premium with iSelect’s life insurance calculator.