Choosing the right life insurance policy means striking a balance between what you’re able to pay today and what you want to leave your loved ones later down the line. And while price is a big factor, there are other important considerations to make when choosing the right policy for you.
1. Policy Type
Life insurance types typically fall into two broad categories: term and permanent.
Term Life Insurance
Term life insurance offers coverage during a certain period of time - think 5, 10, 15, 20+ years. During this time period, you pay a premium and your beneficiaries will receive a death benefit should you die. If the time period ends (and you do not convert or renew the policy), you stop paying the premium and you are no longer covered by the policy. You can think of this type policy as renting versus buying a home.
Permanent Life Insurance
Permanent life insurance is considered more of an investment and covers you from the day you sign up until you die - there is no end date. Over time, your permanent life insurance policy builds a cash value, which you can cash out or use as a loan once it’s reached the date of maturity. Permanent life insurance falls into four main categories: Whole Life, Variable Life, Univeral Life and Variable Universal Life.
Whole life is the simplest and most common option. Premiums remain the same for life, and the death benefit and rate of return on your cash value are guaranteed. With variable life, you can seek potentially better returns by allocating your fixed premiums among investment sub accounts, typically comprised of stocks and bonds. Universal life offers the flexibility of varying the amount o fyour premium payments. It also offers the certainty of a guaranteed minimum death benefit as long as your premiums are sufficient to sustain it. If you do not maintain those minimum premiums, your death benefit can be reduced. Variable universal life premium payments are also adjustable, subject to the minimum needed to keep the policy in force, and you can allocate them among investment sub accounts that offer varying degrees of risk and reward. As you pay into a permanent life insurance policy your premium goes into two buckets. One bucket pays for the cost of the insurance and the other pays into your savings account better known as the cash value. These policies are more attractive than term insurance because the policy is treated as a living benefit just as well as a death benefit. For example, you purchased as permanent $50,000 whole life insurance policy for $240 a year at twenty years old. At age forty-one the same $50,000 policy is still $240 a year, plus you may have $5000 of cash valued you accumulated over the years. You may use this cash value while still living for whatever you wish just as you would if you refinanced on your home and took the equity out. Does this seem like a better deal for you in the long term? For most people it is because the need for insurance becomes more expensive as one ages and may encounter health conditions.
However, term life insurance is typically more affordable to start with for those who are just looking to make sure their children are covered until they go to college. For others looking to make a serious investment and are able to pay more per month, permanent life insurance could be beneficial. As you consider various life insurance policies, deciding which type of policy is right for your unique circumstances should be one of your first deciding factors.
2. Tailored Pricing
Life insurance policy prices will vary greatly, both based on policy type, the provider and your unique circumstances. As you’re comparing prices and shopping around, it’s important to look for a policy that takes into consideration a number of factors - your health, smoking habits, travel history and other habits or indicators. The more in-depth the policy gets, the more tailored it will be to you - meaning you could be getting deeper discounts for healthy lifestyle choices or positive habits. Policies that offer more generic or lenient vetting may make up for it with higher premiums.
Having an affordable policy is important for a number of reasons. The purpose of life insurance is to provide financial security for your loved ones after your passing. That shouldn’t mean, however, that you’re depriving aspects of your financial life today in order to maintain your policy. Find a policy that can t well within your budget - even when times get tough.
When faced with financial turmoil (job loss, divorce, etc.), a life insurance policy may be one of the first things to go. Keeping it affordable from the start may help avoid this. Additionally, if you cancel or lapse on your policy, you may face an uphill battle getting another one - especially if your health has declined in any way.
4. Option to Convert Policy
Say you hit the final year or two of your term life insurance policy, but you’d like to keep it going. Some term life insurance policies offer a conversion feature, which allows you to convert the policy into a permanent one.
One major advantage of having this feature is that you avoid having to go back to the market place and start your policy search all over again. If it’s been 20 or 30 years since you initially bought your policy, you may have developed health conditions that could make it harder to obtain a new policy.
5. Living Benefits
It’s important to find a life insurance policy that can offer you certain benefits while you’re still living. Some policies allow you to take premiums already paid back out to cover medical expenses, care, cancer treatments, etc.
Remember that any funds you take back out of your policy will lessen the amount your beneficiaries receive. However, this option could save you and your loved ones from financial turmoil in the event you fall ill or become incapacitated.
You want to know your loved ones are going to be well-cared for in the event that you pass away unexpectedly. Taking the extra time now to look at your options and choose something that’s right for you can make a big difference in how your policy benefits you and your family later down the line. If you’re working with an agent or financial advisor, ask them to help you review your options thoroughly.
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