When you buy life insurance, you want coverage that fits your needs. First, decide how much you need? For how long? What can you pay? Be mindful that a major reason to buy life insurance is to cover the financial effects of unexpected or untimely death. Life insurance can also be a way to plan for the future. Next, learn what kind of policies will meet your needs and pick one that best suits you. Finally, choose the combination of policy premium and benefits that emphasizes protection in case of early death, or benefits in case of long life, or a combination of the two. It makes sense to ask a life insurance agent for help with these decisions. An agent can help you review your current insurance program; any outstanding needs and give you information about available policies to fit your needs.
What about the policy you have now?
If you are thinking about dropping a life insurance policy, consider the following:
If you decide to replace your policy, don’t cancel your old policy until you have received the new one. You then have a 10-day period to review the policy and decide if it is what you want.
It may be costly to replace a policy. Much of what you paid in the early years of the policy you have now. You may have to pay this cost again if you buy a new policy.
Ask your tax advisor if dropping your policy could affect your income taxes.
As you age or if your health deteriorates a new policy will often be more expensive. Or, you may be uninsurable altogether.
You may have valuable rights and benefits in the current policy that are unavailable in a new one.
In the beginning a policy may not offer benefits for some causes of death covered later as the policy matures.
How much do you need?
Here are some questions to ask yourself:
How will my family pay final expenses and repay debts after my death?
How much of the family income do I provide? If I were to die prematurely, how would my survivors, especially my children, get by? Does anyone else depend on me financially, such as a parent, grandparent, brother, sister, or special-needs relative?
Do I have children for whom I’d like to set aside money to finish their education in the event of my death?
Do I have family members or organizations to whom I would like to leave money?
Will there be estate taxes to pay after my or my spouse’s death?
How will inflation affect my future needs?
As you determine what you have in place to tackle the above don’t forget to account for any life insurance you currently own (including any group life insurance at work), Social Security and pension plan survivor benefits, and other assets (such as: savings, investments, real estate, and personal property).
What is the right kind of life insurance?
All policies are not the same. Some give coverage for your lifetime and others cover you for a specific number of years. Some build cash values and other s do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Some policies may offer other benefits while you are still living (ie. Long-Term Care). Your choice should be based on your needs and what you can afford.
There are two basic forms of life insurance: Term and Permanent insurance. Term insurance generally has lower premiums in the early years, but does not build up cash values that you can use in the future. You may combine permanent with term insurance for the period of your greatest need for life insurance to replace income.
Term Insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally offers the largest insurance protection for your premium dollar. It generally does not build cash value.
You can renew most term policies for one or more terms even if your health has changed. Each time you renew your policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also, ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase. You may also, be able to convert many term insurance policies to a permanent insurance policy during a conversion period.
Permanent Insurance is a type of insurance where the premiums charges are higher at the beginning than they would be for the same amount of term insurance. The part of the premium not used to cover the cost of insurance is invested by the company and builds cash value that may be used in a variety of ways. You may borrow against a policy’s cash value by taking a policy loan. If you don’t pay back the loan and the subsequent interest owed, the amount you owe will be subtracted from the benefits when you die, or the cash value if you stop making premium payments and withdraw the remaining cash value. You can also use your cash value to keep insurance protection for a limited time or buy a reduced amount of coverage without having to pay more premiums. Cash value can be used to increase your income in retirement, or to help pay for needs such as a child’s tuition. All without cancelling the policy. To achieve these benefits you must pay higher premium in the earlier years of the policy. Permanent insurance may be one of the following types: Whole life, Universal life, and Variable Universal life insurance.