Life insurance helps protect your family from financial hardship after your death. However, many people don’t understand how much coverage they need or the different policy options available.
Choosing the right life insurance policy requires consideration of your goals, current and future needs and your budget. Start by determining how long you want your life insurance to last and whether you want it to have a cash value component.
1. Term vs. Whole Life
While many life insurance agents will push whole life policies, term is a more cost-effective choice. This is especially true for young people in good health. Whole life policies are more expensive but they offer a savings component that builds cash value tax-free. This money can be used for a variety of purposes, including paying premiums, and may even pay back a portion of the initial investment.
Whether or not to pursue a whole life policy will come down to a client’s goals and needs. For example, clients who are concerned with funding a trust or leaving behind a legacy will want to consider whole life.
Similarly, investors who are maximizing their 401(k) and Roth IRA contributions and looking for a way to diversify their investments might be interested in whole life. However, for most of our clients, a simple and affordable term life policy will meet their needs.
2. Amount of Coverage
Depending on your situation and financial goals, you may need more or less life insurance coverage. You should consider who relies on you for financial support (children, parents, or spouse) and any future debts that you need to pay off or investments to make.
There are various methods to calculate the amount of coverage needed, but one rule of thumb is to buy a policy that covers 10 times your annual income. You can also consider your medical history and occupation when determining the amount of life insurance you need to purchase.
However, if you have chronic health problems or are in an occupation where you are at higher risk of death, you may want to explore policies that do not require a medical exam. However, these policies usually come at a premium that is higher than those that require an exam. A financial professional can walk you through the different options available to you and help you find a plan that fits your needs and budget.
3. Policy Term Length
The term length of a policy is typically 5, 10, 15, 20, 25 or 30 years. A general rule of thumb is to buy a term policy that covers you until you expect to finish a major financial goal such as paying off a mortgage or raising children.
Longer term policies are usually more expensive than shorter ones. If you have a health condition that could make it difficult to find a affordable no-exam life insurance policy as an older adult, it may be worth considering a longer policy term to ensure your insurability.
Once your level term period ends, you can choose to renew the policy for a specific amount of time each year, or convert it into a permanent policy (which will usually have a higher premium). You can also add life insurance riders to your term life policies which can provide additional coverage on top of the base policy.
4. Premium Payment Term
Once the underwriting process is complete, you’ll receive a life insurance policy that’s been approved based on the information provided in your application, phone interview and medical exam. Then you’ll need to decide what features and riders are important to you.
The premium payment term is the period over which the life insurance premiums must be paid to keep the coverage active. This period may be shorter than, equal to or longer than the policy term and can also be a set number of years.
With permanent policies like whole life or universal, the premium payment term is usually lifelong. This type of policy builds cash value over time and, depending on the assumptions made, can be used to partially or completely pay for future premiums. If you’re looking for an easy way to cover future expenses, this is a good option. However, this type of life insurance is usually more expensive than term coverage.
5. Riders
A rider is an add-on to a life insurance policy that allows you to customize the coverage to your specific needs. Some riders can significantly increase the premium, while others are relatively inexpensive.
The exact types of life insurance riders vary from insurer to insurer, but some common ones include the return of premium rider and child protection rider. Some riders are more specialized, such as the family income rider that adjusts how the death benefit is paid (for example, in monthly installments, much like an income).
A financial advisor or insurance professional can help you understand your options and evaluate whether any life insurance riders make sense for your situation. While riders come at an extra cost, most provide added value that can help you meet your personal and family goals.
6. Beneficiaries
As you’re considering policy options, it’s important to think about what your beneficiaries will need from the death benefit. This can help you determine how much coverage to buy. Generally, financial planners recommend getting enough coverage to pay off your mortgage, debt, children’s college expenses and other major obligations.
Once you’ve decided how much coverage to buy, it’s important to select a beneficiary. Beneficiaries can be primary or contingent, with the latter receiving the death benefit only if the primary beneficiary dies before you.
Also consider whether you want to add riders, which can provide supplementary benefits and protection at an additional cost. Examples include living benefits2, which let you access a portion of your death benefit while still alive, and terminal illness coverage. It’s also a good idea to review your beneficiaries regularly. Changes in life events, like births, divorces or remarriages, may indicate that it’s time to update your policy.