How To Choose The Right Life Insurance Policy
It’s human nature to push aside thoughts about death. But it is the one life event guaranteed to happen to everyone so it’s important to plan for it. A life insurance policy won’t remove the sting of the painful loss, but it can save loved ones from the additional trauma of an unexpected financial burden.
Choosing the right policy is an important part of taking care of your loved ones and this article will help you answer the first questions you should ask yourself when making that decision.
Do I Need Life Insurance?
So, who needs life insurance? When you purchase a life insurance policy, you will pay regular premiums (monthly, quarterly, or annually) to your insurer. In return, the insurance company will pay a certain amount to your beneficiary in the event of your death to help ease the financial strain that your passing may cause on your loved ones.
This payout helps your family maintain their standard of living after you are no longer able to serve as an income earner (find out How to Collect a Life Insurance Payout).
If you have a mortgage payment, life insurance will ensure that the bank won’t have to repossess your home if your family cannot afford the payments after your death.
Even if you don’t have a mortgage payment, life insurance is still the best way to make sure that anyone who relies on you financially – be it a spouse, a child, or even a business partner – is taken care of. If you have any dependents, anyone who relies on your financial contributions, or a mortgage payment, getting a life insurance is a good idea.
Even if none of these considerations apply to you, you may still consider getting life insurance as an investment option (learn more in Insurance as an Investment). Certain policies have an investment component and may be used as part of your long-term financial planning.
It is important, however, to prioritize your financial goals and investment opportunities, and most people shouldn’t use life insurance as a form of investment until they’ve exhausted other options and accomplished other financial goals (including paying off all non-mortgage debts, setting money aside in an emergency fund, and maxing out your 401(k) or Roth IRA as a retirement fund).
What Kinds of Polices Can I Choose From?
There are a number of different life insurance options that you should consider before choosing the policy that is right for you.
Term Life Insurance
A term life policy provides coverage within a set period of time (10, 15 or 30 years, for example). If you are staying on top of your premium payments and die within that term, your beneficiary will receive a payout to help with the loss of your income.
Term life policies typically have less expensive premiums than variable or whole life policies and will allow you to get the most coverage for the least amount of money. However, if you do not die within the set time of your term policy, you’ll get no money back once the term runs out.
It is important to weigh out the cost of monthly premiums with the length of time you need coverage for your family and, should you choose a term life policy, at least consider your plan of action for protecting your family once the term runs out.
Term Universal Life Insurance
Like a term life policy, a term universal life policy provides coverage for a set period of time. However, this option is a bit more flexible, often allowing you to extend the term once you’re in it or change it as you go to reflect changes in your financial situation.
Whole Life Insurance
A whole life policy does not limit your coverage to a set period of time but, instead, provides coverage for your entire life – as long as you keep paying your premiums, of course.
While this may sound like a better option at first glance, the premiums can be much more expensive than those of term life policies, so make sure you weigh the costs and choose a plan you can afford.
Blended Life Insurance
If you prefer a middle-of-the-road option, you may consider a blended life policy. As the name implies, this option blends the term life policy with the whole life policy. Future dividends paid on the policy in its early days are later used to convert term coverage into permanent coverage as you age.
Investment Options
Universal life policies and variable life policies contain an investment option. The face value of your policy can rise or fall with the market. The payout in the case of your death may be only for the face value of your policy or may combine the face value with a cash value as well.
Again, you shouldn’t rely on life insurance as an investment option until you have accomplished other financial goals and exhausted other investment options, including your retirement fund.
How Much Coverage Do I Need?
Your life insurance policy exists to take care of your loved ones. They may rely on the payout for years, which means you may need more coverage than you first think. A good rule of thumb is to attain coverage that is worth ten times your annual income.
This will help your family maintain the standard of living to which they are accustomed. There are also numerous tools available online to help you determine how much life insurance coverage you need.
When choosing a life insurance plan, it is important to weigh out the size of the coverage with the ongoing cost you will incur. Premiums vary based on the amount and type of coverage, and they often take into account age, sex, health and lifestyle.
Pre-existing conditions may lead to higher premiums or even denial of coverage. Make sure you can afford the premiums now and keep an eye on them in case they increase at some point down the road.
What Should I Do Next?
Although the number of options may seem overwhelming at first, it is important that you not become frozen in indecision. Speak with an insurance agent who can not only help you find the best policy for your needs while also looking for ways to save you money.
With their help, look for a policy that will cover all or most of your income for as long as your family will need it, make sure you can afford the premiums, and don’t waste any more time getting a life insurance policy. If you are looking to change your plan to a different policy, never cancel your old plan until a new one is place.
No one likes thinking about the end of their life, but taking the time to push through those feelings of fear and discomfort to choose a life insurance policy is the best way to show your loved ones you care about them and to make sure that they will be well taken care of, even after you’re gone.
While there are different types of insurance policies on the market, what they all provide is a way to buffer your loved ones form the financial hardships of your passing. But a lot of people who want to get this kind of coverage don’t know where to start. So, we are offering these 9 tips to help you navigate the insurance market and find coverage that is suitable for your needs.
1. Make Sure It Covers All Your Needs
Life insurance comes in two basic categories: term and permanent. Term life insurance policies only cover you for a set period of time, while the permanent life insurance covers you for as long as you keep paying premiums.
Permanent insurance products also often pull double duty as investment vehicles in the following forms:
- Whole life insurance is a fixed premium return product with a savings component. The policyholder can withdraw or borrow against the growing cash value of their policy.
- Universal life insurance allows policyholder flexibility in terms of the premium amount and includes a savings and investment component.
- Variable life insurance is similar to universal life insurance; however, the benefits are linked more directly to the performance of the investment and can shift the risk to the policyholder.
2. Look for a Premium You Can Afford
Term insurance is much cheaper and may suit those who cannot afford permanent insurance. Of course, it is also a better option if you want a set period of coverage. Permanent life insurance is more expensive because it can last the entire life of the policyholder and has additional fees due to the investment component (see Insurance as an Investment? to find out more about permanent insurance as an investment vehicle).
When deciding on a policy, make sure you can budget in the premium over the long term or for the entire life of the policy. Otherwise, a suspension of coverage would waste all the premiums you’ve paid up until that point. No one knows their future, so it’s advisable that you have money set aside, especially if the policy you want has a variable premium.
3. Review Multiple Life Insurance Policies
Do some research and talk with various insurers and agents before settling on a policy. This lets you learn more about the types of coverage available and their associated costs. Compile the data and compare it on your own so you find an affordable and reasonable price for the coverage you want.
4. Carefully Weigh Extra Features or Benefits
Many insurers offer various other benefits to a life insurance policy for an additional fee. This may include accelerated death benefits, accidental death, terminal illness, or return of premium riders.
Due to the additional cost, make sure you need the coverage and that it is worth the price. For instance, a healthy, middle-aged adult with a clean family medical history has a lower likelihood of benefiting from a terminal illness rider and the extra cost. And some are just not worth it. It’s best to avoid lender-offered policies that would pay for your mortgage or other debts. Straight-up policies typically provide more coverage for less.
5. Never Lie to Get a Lower Premium
This is a particularly risky move. If your insurer finds out that you lied on your application, they may deny coverage, cancel the policy without a refund of premiums already paid, or ask for a much higher premium.
Moreover, if you die and the insurer finds out about your lie, your beneficiary will no receive the death benefit, nor a refund of the premiums you paid throughout your life, effectively making your life insurance policy entirely useless. And if you die from a condition the insurance company had no idea you had, there is a possibility that the policy will not pay.
6. Always Pay Your Premiums
Not making timely payments may lead to extra charges or cancellation of the policy. Some insurers may be more understanding or allow a certain late period before suspending coverage, but it’s important to pay the full amount on time. For convenience, you could set up auto-payments from a savings account.
7. Review the Policy Regularly
This ensures that the insurance coverage is up to date in terms of the changes that may have occurred in your life since you purchased it. Consider reviewing it at the end or beginning of each year. Doing so also helps you balance your financial situation and other plans, such as marriage, having a baby, retiring, or selling you house.
It is also important if you need to convert your term insurance to a permanent policy in case your health changes for the worse. This is because you may not be eligible to for a new policy.
8. The Earlier the Better
Buy life insurance when young because it will always be much cheaper. More often than not, the younger you are, the less you will pay for more coverage as compared to an older individual (find out what is The Perfect Age to Get Life Insurance).
9. Tell Your Beneficiary
When you die, your beneficiary must be aware of the existing policy in order to follow-up and file a claim. No insurance company is going to come out to reveal of the death benefits to the listed beneficiary.
Conclusion
Since there is such a large variety of coverage options and benefits available in life insurance products, follow these tips to get your feet wet and stop you from making any rash decisions. Take the time to carefully consider the many policies and features available before settling on one.
