What to consider when purchasing life insurance
I try to make life insurance as simple as possible when I speak with people. I believe there are three basic reasons to purchase life insurance:
- Financial protection for dependents. This is the reason most people give for purchasing life insurance coverage on themselves. A tax-free, lump sum payout called a death benefit is paid to the policy beneficiaries you identify. The coverage amount is typically designed to cover living expenses, education costs, mortgage payments, your final expenses, and many other financial obligations following your death.
- Estate planning. Life insurance is a great tool in an estate plan. For example, the death benefit from a life insurance policy can be used to pay estate taxes to unburden loved ones from this potentially significant cost.
- Retirement income for the policy owner. Permanent life insurance (to be covered later in this article) provides a savings and/or investment component that accumulates over the life of the policy. The policy owner can access this cash while they are alive as a source of income to meet other financial obligations. That sounds pretty good, right?
What is the right type of life insurance for you?
An insurance policy is a contract between you and the insurance company. Different types of life insurance are available from a wide variety of insurance providers. The policy owner makes regular payments called premiums in return for the financial protection included in the policy.
There are two primary types of life insurance policies: term and permanent.
Term Life Insurance Policy
This type of policy is for a fixed time period, typically 10, 20, or 30 years. Premiums are level, meaning they won’t change during the policy term.
There are three primary reasons people purchase term:
- Cost. It is the lowest-cost life insurance you can buy because it is in force for a fixed period of time with no cash value or investment component.
- Coverage During Important Time Periods in Your Life. Term is often what families purchase during child-rearing years. The amount of insurance they need is based on the family’s financial situation and financial strength. For example, a 20- or 25-year term policy purchased when children are young ensures the family is protected in the event of the policyholder’s death while the children are at home.
- Income Protection While Employed. A term policy’s death benefit can replace the deceased’s income to ensure a family’s lifestyle and financial security remain consistent.
Don’t forget, term insurance is less costly than permanent insurance because it is for a specified period of time and does not include cash value or investment components.
Permanent Life Insurance Policy
There are many types of permanent life insurance that are designed to provide coverage for the policy owner’s entire life and include what’s called a cash value or investment component. This important component devotes a portion of the premium payment to an investment-type account that grows tax-deferred.
Permanent insurance comes in a variety of types:
- Whole Life Insurance. This provides cash value growth at a specified interest rate.
- Universal Life Insurance. Cash value grows at money market rates, which could provide higher growth than whole life fixed rates.
- Indexed. Index policies are linked to the performance of specific financial indexes such as the S&P 500.
- Variable Universal Life. This provides more flexibility to choose the type of investment vehicle, including stocks, bonds, and others.
Along with coverage for your entire life, this type of coverage provides a myriad of ways for tax-deferred growth as part of an overall financial plan.
The right type of life insurance policy for your situation depends on a variety of factors including health and medical history, age, gender, lifestyle, and other factors. Some permanent policies will require a medical exam as part of the application process.
Permanent insurance typically has higher premiums than term.
What is the best way to purchase a life insurance policy?
You have a lot of options, from the traditional face-to-face relationship with a licensed agent to the ever-widening variety of online resources. Here are the most common:
- Independent or Captive Life Insurance Agents and Financial Advisors. Independent agents represent many life insurance companies, while captive agents typically represent one company. Also, many financial advisors become licensed insurance agents to provide more services to their clients.
- Online Resources. Similar to agents, there are resources that represent multiple companies, while some of the largest insurance companies allow customers to purchase directly from their websites or via telephone. Some of these options allow you to purchase insurance without speaking to an agent.
- Employer Sponsored. Check with your company’s HR department to determine if they offer group life insurance.
And, a final piece of advice: if you are considering life insurance for the first time, I strongly encourage you to speak with a licensed professional to discuss your personal situation, such as your current financial goals, family needs, and medical history.
Be prepared with questions that will help you determine if their products fit your specific needs.
Have more questions? Call me today!
