When you invest, you put part of your income into a variety of assets to help you meet your financial goals. But what happens if you can no longer provide income to invest or even to pay everyday living expenses? Your illness, disability, or death could radically change your dependents’ quality of life and expectations for the future.

As you create your financial plan, you should consider these risks. To make sure those who depend on you are taken care of, you can buy life and disability insurance to help replace your income, and long-term care insurance to pay for extended healthcare costs.

Risk and Cost

The cost of life insurance varies significantly, depending on the type you buy, the insurance company, and the risk you pose as shown on an actuarial table. These tables predict life expectancy based on your age, health, life style, and gender. If you’re considered high risk — for example, if you smoke, are overweight, or have a dangerous hobby like skydiving or scuba — the company is likely to charge a higher premium or refuse to insure you at all. But if you’re a nonsmoker whose health and life style predict that you’ll live longer, you are likely to pay less.

Working with an agent

There are a number of advantages of working with a life insurance agent to choose a policy. Agents can help you assess your financial circumstances, define your coverage needs, and suggest whether a term or permanent policy might work best for you. The more questions you have about how life insurance can help meet your financial needs, the more important the professional and personal attention you receive from an agent can be in selecting the right policy.

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When you meet with an agent, the first thing you’ll do together is a needs analysis. You’ll want to take your financial records with you to the meeting, including a summary of your assets and liabilities. If you have a written financial plan, it’s a good idea to take that as well. If you have existing coverage, you and the agent will probably also review whether it meets your current needs.

As part of your conversation, you can ask the agent about his or her experience, credentials, and compensation for working with you.

Prepare for setbacks

If a disability or serious illness strikes, it can have lasting effects on your finances. If you have dependents, the consequences may be even greater, since you’ll still have to provide for their basic living expenses while you’re laid up.

To prepare for this possibility, you can buy disability insurance to replace a percentage of your income. Without disability insurance, a serious medical condition could make it difficult to pay the bills, and it could throw off your entire financial plan. Not only might you have to stop contributing to your retirement and college investments, but you may find it necessary to plunder them to make ends meet. Even after you go back to work, you may have difficulty restoring your accounts to their previous levels, and you’ll have lost any potential earnings you would have received by leaving the money invested.

Life insurance companies originally did not insure women. When they began doing so in the late 1800s, they charged women higher premiums than men, due to the higher mortality rates associated with childbirth. Today, because women tend to live longer than men, they often pay lower life insurance premiums for the same amount of coverage.

What’s more, your financial security could be at risk if you develop a medical condition that leaves you unable to perform the basic, everyday activities of life on your own. Unfortunately, long-term care can be expensive and generally isn’t covered by traditional health insurance. You may want to consider insurance contracts that will help pay for these costs.

Insuring the Future

Life insurance

Life insurance serves multiple purposes. It can cover the costs associated with your death, sometimes known as final expenses. These could include funeral arrangements, any legal expenses involved in settling your estate, and your outstanding debts.

But life insurance can do much more. The beneficiaries you name on the policy you buy can use the death benefit, also known as the face value, as income replacement to pay for their living expenses, maintain their standard of living, and save for their goals.

Life insurance can also help you while you’re alive. For example, some policies have an account value, against which you may borrow. The death benefit will be reduced until you repay, but the loans are usually easy to arrange. Some policies also allow you to use a portion of the death benefit to cover the costs of a terminal illness.

The amount of insurance you need depends on your life situation and your financial situation. One rule of thumb suggests that your death benefit should be seven to ten times your annual income. But it’s relatively simple to calculate your actual need using the online calculators available on insurance company websites.

Stay at home?

If you’re not the family breadwinner, you may still want to consider life insurance to replace the value of the services you provide at home. For instance, if you’re a stay-at-home mom, how much would it cost your family to hire someone to do the work you do now?

What Is The Role Of Insurance In Financial Planning? by Inna Rosputnia

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