Purchasing life insurance coverage can be one of the most important and enduring financial decisions the head of a household makes for his or her family. A life policy can ensure that a family’s most pressing financial obligations are met even if a primary caregiver is suddenly absent. These include commitments to mortgage and car payments, medical bills, and student tuition expenses.
Since policy options vary as widely as the policyholder needs they cover, shopping for life insurance can also be very difficult. Before committing to one policy over another, consumers must carefully consider their coverage needs and options. Let’s get started with the basics:
Who Needs Life Insurance, and How Much?
People primarily purchase life insurance to provide for their beneficiaries in case of an unexpected death. And while policy sales and life insurance coverage rates are at their lowest levels in fifty years, most Americans admit that they could use more coverage:
- According to a 2013 report by the Insurance Information Institute (III), 33% of Americans believe they are underinsured.
- The Life Insurance Marketing and Research Association,or LIMRA, reports that 43% of consumers buy policies after specific life events like getting married, having a baby, or buying a house.
- In one J.D. Power survey of individuals who were widowed between the ages of 25 and 55, only 25% believed that their deceased spouse had adequate life insurance.
How Much Life Insurance Is Enough?
All life insurance provides a death benefit. This is the amount of money an insurer pays if the insured person passes away while the policy is in force. Sometimes the amount of the death benefit is also called the face value of the policy.
Purchasing a policy to cover dependents is not the only reason people or companies purchase life insurance, but it is the primary motivation for most consumers. With this in mind, the ideal amount of life insurance is enough to help your family live comfortably without the benefit of your income. The California Department of insurance provides some good tips to help people figure out how much life insurance to purchase.
- Figure out how much money your dependents would need to continue with their current standard of living if they lost your support. You might consider outstanding loan balances, monthly bills, and plans for the education of your children.
- Balance an ideal death benefit against the cost. No insurance policy will do your family any good if you end up dropping it because it costs too much.
- Shop around to compare prices and benefits offered for policies from a variety of different insurers.
Types of Life Insurance Policies
Many financial advisors and insurance agents have strong opinions about which kind of life insurance is best. Before you consult with an agent or an insurance representative, familiarize yourself with the basics so you can get an idea of your policy options and which may be best suited for you and your family. Start with the two basic types: cash value and term policies.
Term Life Policies
Term life policies are the most popular and common coverage plans available. They are active for a specific length of time. The term could be a few months or a few decades, but the contract always comes with a definite end date; and these policies have no cash value if you survive beyond the end of the contract. Since term policies are temporary and usually have no cash value, they are best suited for individuals who want to provide a financial safety net for their families in the event of a premature death. Since they are temporary contracts, insurers can guarantee higher benefit payouts for lower premiums.
To give you an idea, consider that a term life policy that guarantees a death benefit sum of $500,000 may cost a policyholder between 25-55 well under $500 a year while the policy is active. Alternately, annual premiums on cash value policies or term policy renewals can cost well into the thousands once you reach a certain age or if the status of your health changes.
Cash Value Policies
Whereas term life policies guarantee a set death benefit sum for a certain time, cash value policies work more like investment vehicles. They are more expensive, but they offer a cash accumulation feature and are typically permanent policies. In other words, your coverage will remain active as long as you continue making payments, or choose to cash out the policy.
This is the best policy for those who want to guarantee that their beneficiaries will receive the full cash value of the policy at the time of their death. Because cash value policies are permanent and can grow a cash value, they are more expensive than term policies. The most common kinds of cash value policies are whole life and universal life coverage.
Whole Life Coverage
This type of permanent cash value life insurance typically provides coverage for an entire life for a constant, agreed-upon premium. Whole life offers more consistency than other permanent cash value policies because the death benefit, its premiums and even the interest rate of your cash investment can be frozen at the time you buy the policy.
Universal Life Coverage
Also a permanent and cash value type of life insurance, this kind of policy provides more flexibility than whole life. Within limits, premiums and the face value can be changed over the course of the policy’s life and policyholders can renegotiate terms and adjust coverage to meet their current needs. That said, unlike with a whole life policy, the death benefit can vary based upon the performance of the money market the policy is invested in. If the investment value increases, the face value will rise. If the investment value decreases, the death benefit could decline. If you want a cash value policy, but you’re younger or you think that your coverage needs may change, a universal life policy is ideal. Because while your rate of return can vary, you will have more options to lower, raise or even borrow against your cash value throughout your life.
Variable Universal Life Coverage
This policy hybrid offers the investment security of variable life with the flexibility of universal life. The details of these policies must be worked out with your provider to determine what a balanced policy for your needs might be, but keep in mind that premiums for tailored policies will typically be higher and subject to change as your health and financial circumstances change.
This graph outlines the typical features of each of these common policy types:
| Term | Whole Life | Universal Life | |
|---|---|---|---|
| Source: California Department of Insurance | |||
| Premium | Low, increases with age | Level | Level, Flexible |
| Face Amount | Level or Decreasing, Renewable into old age | Level | Level, Flexible |
| Cash Value | No | Yes | Yes |
| Policy Loans | None | Yes | Yes |
Original article and pictures take www.insurancequotes.org site
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