Life insurance is a topic no one likes to talk about but, to financially protect your family and any other survivors you name as beneficiaries if you should die, it is important to consider buying life insurance. Generally, the younger you are and the better your health, the lower your premiums will be. Knowing the right amount of coverage and the right type of policy to purchase will depend on your needs and the needs of your survivors. Do your homework by shopping around and comparing policies carefully.
Before you begin shopping for life insurance, it is important to be able to distinguish between the different kinds of policies available. There are basically two types of life insurance: term insurance and a cash-value policy.
Term insurance: This basic type of life protection offers death protection for a term of one or more years and accumulates no cash value. You pay a premium based on a statistical risk that you may die while the policy is in effect. If you die within that term, the insurer pays out death benefits to your named beneficiaries. Term insurance usually provides the most insurance protection for your money, especially for younger policy holders in good health. Two main kinds of term insurance are:
- Annual-renewable term: This type of policy, which features low premiums that rise as you age, is purchased every year. You can renew coverage automatically every year, even if your health has changed. As with all types of life insurance, premiums rise each time you renew the policy.
- Level-premium term: This type of policy is bought in five-, 10-, 15-, 20-, 25- or 30-year increments and typically charges the same premium for every year of coverage within each term. You need to pass the insurer’s health criteria every time you renew the policy after your term expires.
Cash-value policy: This type of life insurance (often called permanent insurance) combines the protection of life insurance with an investment vehicle, allowing you to reap a moderate return on your money put into the policy. Cash-value policies are more expensive, but can sometimes be a good option, especially for older people who often find that term insurance is too costly. The four main kinds of cash-value policies are:
- Whole life: This popular choice blends life insurance with a fixed-rate investment that accrues cash value. The premiums, cash value and death benefit are fixed when the policy is issued; you pay the same premiums for as long as you live, although these premiums can be much higher than you would pay initially for the same amount of term insurance.
- Universal life: This type of policy typically yields a market rate of return, although the policy’s cash value is not fixed or guaranteed. The premium amount that goes toward each component usually is indicated clearly in the policy.
- Variable life: This kind of policy invests a portion of your premium in a stock or bond mutual fund vehicle, and the policy’s cash value is not guaranteed. The death benefit due to your survivors will fluctuate depending on the performance of these investments.
- Endowment insurance: An endowment policy pays a sum to you, the policyholder, if you live to a certain age. If you die before this set age, your beneficiaries receive the death benefit. However, premiums and cash values for this type of insurance typically are much higher than for the same amount of whole life insurance.
The type of policy that is best for you will depend on several factors that you should consider carefully before buying:
- The needs of your beneficiaries: How many dependents do you have? How much cash and income will they require if you die? Consider all the important expense and income factors, such as:
- Surviving spouse’s income
- Value of all investments, including stocks, bonds, mutual funds, retirement plans, etc.
- Social Security benefits. The maximum benefit is $34,000 per year until your youngest child turns 16
- Mortgage payments
- Living expenses
- Education costs, including college tuition for your children
- Child care costs if the surviving parent must work
- Elder care costs
- Taxes, including income taxes and any estate taxes
- Outstanding miscellaneous debts
- Funeral expenses for your death (such expenses typically average $6,000 or more)
- Affordability: How much coverage can you afford? Most policies start at $250,000 coverage, for which a non-smoking, healthy 30-year old may expect to pay under $200 for each year of a typical 10-year term policy at current rates. These rates jump significantly as you get older.
- Your age and life situation: Most people who are retired, whose loved ones no longer depend on them for support or who have a substantial amount of wealth may not need life insurance.
How much coverage you should purchase will depend greatly on these factors. Many experts recommend buying a life insurance policy equal to at least 10 times your current annual salary.
When shopping for life insurance, you ideally want to qualify for an insurance company’s preferred rate. This requires you to be in good overall health, be a non-smoker and not engage in risky hobbies or occupations, such as piloting a small aircraft. If you have a medical condition, such as high blood pressure, or a family history of such a condition, you probably will be quoted a higher premium.
- Enlist a professional. Look around for a reputable insurance agent or broker in your area who can help you shop around for quality policies and answer all of your questions. Try to use an impartial agent who does not work on commission and who will not push you into buying a certain type of insurance product.
- Consider a policy for each spouse. Determine how needy you or your spouse would be in the event that one of you passes away. Base the amount of coverage you purchase on each of your expected needs, following the guidelines stated previously.
- Shop by price. Add up all of the premiums over the entire term for each policy on your list, and use that sum to compare between similar policies. You may need the help of an insurance agent who can use industry formulas to get you an accurate calculation.
- Research life insurance companies and their policies. There are hundreds of life insurance companies that sell policies. Get referrals from friends and family members, and check out reputable names. Ask the insurance agent with whom you are working to compare policies against cost indexes commonly used by insurance experts. The lower the cost-index number of the policy, the better the value.
- Be honest. Do not withhold important health, medical or lifestyle information. For example, if you are a smoker but claim you do not smoke when applying for coverage, your survivors may be denied a death benefit should you pass away.
- Make sure the coverage you buy is renewable to an advanced age.
- Be sure the term insurance policy you buy is convertible, meaning that you can trade the policy for a whole life or endowment insurance policy before the end of the conversion period.
- Try to opt for guaranteed premiums. This feature ensures that the price you pay annually for coverage will not rise for the entire term of your policy. The guaranteed-rate policy you buy also should not require you to provide further evidence of insurability.
- Comparison shop when buying a cash-value policy. Compare the price against what you would pay for term insurance. Term will almost always be less expensive for insurance shoppers under age 50.
- Avoid unnecessary features. Think twice before opting for costly add-on features, such as waiver of premium, which continues to pay your premiums if you become permanently disabled, or a re-entry rider, which requires you to continually meet the company’s good health requirements.
- Buy for the long haul. Make the commitment to stick with your policy, especially if it is a cash-value policy. If you cancel within the first few years of a long-term policy, you may get little or nothing back. Instead, do your homework, and shop for the best value over a 10-year term or longer.
- Review your life insurance every five years. Have your needs changed? Do you need more or less coverage? Have you had any major life events, such as divorce, birth or adoption? You could save money by shopping around every few years for a different policy.
- Be sure you understand all of the fine print. Read the terms and conditions carefully. Ask the selling agent about anything you do not fully understand before signing on the dotted line.
when it’s all said and done ,Having life insurance will give a peace of mind,