Life Insurance can protect your loved ones from the unthinkable and should also meet your needs now.
The average person spends a great deal of time planning for career, family, important milestones and even day-to-day things like meals and holiday parties. Often overlooked, is the plan for life insurance. Life insurance provides for those left behind, financially both short term and long-range. The idea that one’s family would enter hardship in the event of an untimely death is frightening and heartbreaking, yet most people do not think about life insurance as a way of preventing just that.
It’s never a pleasant discussion to have. But when you finally do meet with an expert who understands your goals, family needs and truly has your best interests in mind, you will likely recognize that life insurance is something you not only need, but truly want.
Step One: Decide on Need and Timeframe
Life insurance can help minimize the impact to your family in the event of your death. It is also an important tool in ensuring funding for college, preserving your family’s lifestyle, and reducing stress through debt elimination. Before you select a policy, you must determine how the insurance will be applied and the likely timeframe at which the policy will be used.
Step Two: Choosing the Amount
One way to decide how much life insurance you need is to estimate how much cash on hand and ongoing income your dependents would need after you’re gone. Treat life insurance as the money source needed for expenses of final illnesses, burial costs, taxes, mortgages or other debts, as well as, the income necessary for your family’s living expenses, educational costs and other future expenses.
Step Three: Choosing the Right Type
Depending on the goals you have for your family and the timeframe in which you expect to use your policy, your selection may differ. It is important to understand how each of the policy types provide coverage and how they best fit into your overall plan. While all life insurance policies agree to pay monies upon your death, not all policies are the same. There are three basic kinds of life insurance:
- Term insurance – Term insurance is death protection for a “term” of one or more years. Death benefits will be paid only if you die within that period, and generally provide the largest immediate death protection for your premium dollar. Some term insurance policies are “renewable” for one or more additional terms even if your health has changed, but premiums will be higher. You should check the premiums at older ages and the length of time the policy can be continued.
- Whole life insurance – Whole life insurance gives death protection for as long as you live. This ensures your premium will stay the same throughout your life, however the costs can be several times higher than you would pay initially for the same amount of term insurance. But they are less than the premiums you would eventually pay if you were to keep renewing a term insurance policy until your later years.
- Endowment insurance – An endowment insurance policy pays out to the policyholder upon turning a certain age. If you were to die before then, the death benefit would be paid to your beneficiary. Premiums and cash values for endowment insurance are higher than for the same amount of whole life insurance. Therefore, endowment insurance gives you the least amount of death protection for your premium dollar.
Step Four: Understand the Cost
Thinking of the cost as the difference between what you pay and what you get back, you can compare both the premium and the “cash value,” if any. With some policies you pay a premium for life insurance and get nothing back, while other policies provide cash value later upon surrender, making the overall cost smaller than total premium paid.
Step Five: Best Value with Cost Indexes
Cost indexes use one or more of these factors to give you a convenient way to compare relative costs of similar policies. When you compare costs, an adjustment must be made to consider that money is paid and received at different times. It is not enough to just add up the premiums you will pay and to subtract the cash values and dividends you expect to get back. These indexes take care of the arithmetic for you.
Using the indexes, Life Insurance Surrender Cost Index and Life Insurance Net Payment Cost Index, it’s important to remember that a policy with a small index number is generally a better buy than a comparable policy with a larger index number.
Step Six: Select the Best Priced Policy
Cost comparisons should only be made between similar plans of life insurance. Similar plans are those which provide essentially the same basic benefits and require premium payments for approximately the same period of time. The closer policies arc to being identical, the more reliable the cost comparison will be.
Compare index numbers only for the kind of policy, for your age and for the amount you intend to buy. Since no one company offers the lowest cost for all types of insurance at all ages and for all amounts of insurance. it is important that you get the indexes for the actual policy. age and amount which you intend to buy.
Small differences in index numbers could be offset by other policy features, or differences in the quality of service you may expect from the company or its agent. Therefore, when you find small differences in cost indexes, your choice should be based on something other than cost.
Lastly, be sure you can afford the premium, and that you understand its cash values, dividends and death benefits.
It is important to remember that the best policy is the one that works for YOU. It is essential to know who you will be providing for, what amounts are needed to do so, and how long it will likely be before you use the policy.
Don’t buy life insurance unless you intend to stick with it. A policy which is a good buy when held for 20 years can be very costly if you quit during the early years of the policy. If you surrender such a policy during the first few years, you may get a little or nothing back and much of your premium may have been used for company expenses.
An agent who specializes in Life Insurance is the best resource to assist you in making important policy comparisons and will happily do so at no charge to you.