This life insurance buyer’s guide can help you decide how much insurance you need when choosing a policy that addresses your needs and fits your budget. Common uses of life insurance include mortgage and income protection, legacy planning, asset protection, estate planning, final expense and wealth protection.
Things to Consider
- Review your own needs and circumstances – what do you want the insurance to do?
- What happens if/when the premium increases later and you still need insurance, will you still be able to afford it?
- Don’t replace one policy with another unless the new policy represents a net gain. Replacing your insurance may be costly.
- Ask your agent about anything in the policy that is not clear to you.
- Review your life insurance policy with your agent every few years to keep up with changes in your life.
Buying Life Insurance
When you buy life insurance, decide how much you and what you can afford to pay. The most common reason to buy life insurance is to plan for the future by covering the debts and your financial obligations when you pass. Choose the combination of policy premium and benefits that provides protection in case you pass prematurely, live longer than expected or a combination of both. It makes sense to speak to an agent to review your insurance needs to information about policies that may be a good fit.
What About the Policy You Have Now?
If you are thinking about dropping a life insurance policy, don’t cancel your old policy until you have received the new one, as you have a minimum period to review your new policy known as a “free look” period. You should ask your tax advisor if dropping your policy could affect your income taxes. If you are older or your health has changed, the new policy premiums will often be higher. You will not be able to buy a new policy if you can’t get approved. Are benefits in the new policy an improvement when compared to your current policy?
If the policy you have now no longer meets your needs, you might be able to change your policy or add to it to get the coverage or benefits you want without replacing it. Keep in mind that a new policy may pay no benefits for some causes of death covered in your current policy. In sum, if you are thinking of buying a new policy, check with the agent or company that issued your current policy and ask for an updated illustration.
How Much Insurance Do You Need?
Here are some questions to ask when deciding on the amount of the policy:
• If I were to die early, how income would I need to replace for my family or anyone else who depends on me?
• What debts/ obligations, including my kid’s education, need to be covered in the event of my passing?
• Do I want to leave money to any organizations?
• Will estate taxes have to be paid to pay after I pass?
Add up the assets you have now, including Social Security and pension plan survivor’s benefits. Which assets would your family have to cash in or sell to pay expenses after your death?
What Type of Life Insurance?
Some policies, like permanent insurance, give coverage that lasts a lifetime and others cover you for a specific period. Some policies have a b cash value component while some policies offer living benefits. There are two basic types of life insurance are term insurance and permanent insurance. Term insurance generally has lower premiums in the early years but becomes more expensive as you age Term insurance does not build cash value. You can, however, combine permanent, or cash value life insurance with term insurance to replace income.
Term Insurance pays a death benefit only if you die during that term. It does not build up cash value. When you renew a term policy, premiums will most likely be higher. Ask your agent if you will lose the right to renew the policy at some age. Some carriers will give you the right to keep the policy in force for a guaranteed period for a higher premium at the same face value each year. At some point, you may need to pass a physical examination to continue coverage. A conversion period allows you to trade a term insurance policy for a permanent policy even if you are not in good health.
Permanent Life Insurance
Permanent life insurance, also known as Cash Value Life Insurance provides coverage for the policyholder’s life Permanent insurance has a cash value component and therefore has higher premiums than term insurance. Most permanent life insurance policies have a level premium payment, a portion of which is allocated to the cost of insurance with the balance deposited into a cash value account. The cash value account earns a modest rate of interest, with taxes deferred on the accumulated earnings.
Whole Life Insurance
Whole Life Insurance is designed to provide coverage for a lifetime. Initially, premiums are higher than you would pay for the same face amount of term insurance. But as we age, term insurance “catches up” with whole life( and other types of permanent insurance) and eventually becomes more expensive, causing many policyholders to cancel when the premiums are no longer affordable. There are also “LimitedPay” Whole life policies such as a”10-pay” or” 20 pay” or Until 65. Premiums for these policies are higher since the premium payments are “compressed” into s shorter period.
Universal Life Insurance
Universal Life Insurance lets you adjust the face amount of your coverage and vary your premium payments. The premiums minus expense charges go into a policy account that earns interest. If the expense charges exceed the premiums plus interest earned for the year, your account value will drop. If it continues to go lower, your coverage will lapse. To prevent this from happening, you may need to increase your premium payments or lower your death benefits.
Variable Life Insurance
Variable Life Insurance policy has a cash value component, which is invested in a number of sub-accounts similar to a mutual fund. If the underlying investments perform well, it will result in higher death benefits and cash value. if the underlying investments do not perform well your benefits and cash value will be lower or may disappear altogether. You may pay an extra premium for a guaranteed death benefit.
Life Insurance Illustrations
Life insurance illustrations are projections, prepared to show how your policy will perform over your lifetime. It includes financial projections for each year. For term policies the projections extend to when the policy ends. The projections for permanent life insurance show data that stretches well beyond your 100th birthday. You will be asked to sign a statement that says you understand that some of the numbers in the illustration are not guaranteed.
Finding a Good Value in Life Insurance
Once you have decided on the type of life insurance is best for you, compare similar policies from different carriers to find the best value.You should also consider other factors, such as how quickly does the cash value grow? is the cash value low in the early years that build quickly later on or is there a level cash value build-up? illustrations can be helpful in understanding what to expect for different situations.
This guide is meant to be a primer on different types of life insurance to give you a realistic idea of what to expect when choosing a life insurance policy.