Buying life insurance is one of the most important decisions you will ever make. Buying a cash value policy when term insurance would be more appropriate could cost you to pay thousands of dollars more in premium then necessary. Buying a policy that terminates prematurely could cause your financial plan to fail and not buying enough coverage could cause you to leave your family’s financial future to chance. That’s why buying the right policy could end up being the most important financial decision you will ever make.
Please review the term and permanent insurance section of this site for a more detailed description of the different types of policies. To help you make a more informed decision on which policy is right for you, please review the key considerations below.
How do I determine an appropriate amount of life insurance?
Every household is different and there is no magic formula for determining how much life insurance you need. However, careful consideration of your financial obligations is a great place to start.
Typical obligations include:
- Covering the cost of your mortgage payments for x number of years or paying your mortgage off completely,
- Covering your family’s monthly expenses such as utilities, clothing, daycare and groceries,
- Covering funeral costs,
- Covering estate taxes,
- Providing for future financial obligations like college and retirement funding.
Assessing your family’s ability to meet these obligations depends on your current resources (your spouse’s income, investments and any life insurance currently in force). The difference between your financial obligations minus your current resources is the approximate amount of life insurance you need.
What type of policy should I buy, term or permanent?
Every product has its place in the financial pie the most important thing is to use it appropriately. For example: you would never expect to save for retirement using your checking account nor would you expect to write a check for your phone bill using your mutual fund. Each of these financial products is an appropriate tool, but only if used correctly. Your circumstances and financial goals will determine which policy is the most appropriate for you.
Term insurance by definition is designed to meet a temporary need. However, in today’s market “temporary” can be for as long as 30 years. It is designed to provide protection for a specific period of time, the "term" and will only pay the life benefit if you die during the term. The most popular term product today is level term insurance and it can be bought in various intervals; 5, 10, 15, 20, and 30 are the most common intervals. One of the benefits of this type of insurance is that you can match up a specific need for insurance with the most appropriate policy and avoid over paying for coverage you otherwise don’t need. For instance, if your mortgage will be paid off in 20 years then you would only need to buy a 20 year level term policy.
Permanent insurance provides lifelong protection. Whether you are buying universal life, variable universal life, whole life, or second to die policies as long as you pay your premiums your policy will stay in force. Premium payments can be designed to last a lifetime or they can be designed to last for a shorter period, 10 years as an example, or they can be designed for a specific dollar amount. Because it is designed to last a lifetime, permanent life insurance accumulates cash value. This cash value can be used to help pay future premiums which in turn help sustain the policy or it can be used as a living benefit. For instance, if you have built up a substantial cash value you could take systematic withdrawals as a supplement to your retirement income.
In summary,term insurance offers the most coverage for the lowest initial premium and is the most appropriate for a temporary need while permanent insurance is most appropriate for people who need lifelong protection.
Does it make sense to replace my current policy?
Term insurance is not as complicated a product as permanent insurance and analyzing your current policy and comparing it to various alternatives is fairly straight forward. Contact us to discuss your financial goals and objectives to determine if replacement makes sense.
Due to the complexities of permanent insurance; it is impossible to determine whether or not it makes sense to replace an existing permanent policy without doing an in-depth analysis of your current plan and the policy you are considering. In many situations it may not be to your advantage to replace it.
Before dropping your current policy, please make sure your new policy is in force.
If you are considering replacing your existing policy, start by answering these questions.
- Has your health status changed since originally purchasing your current policy? If your health status has changed, you may no longer be insurable. You may no longer be insurable at preferred rates.
- Has your age changed? If you purchased your current policy several years ago your new policy will be based upon your new attained age and could cost more because of your new older age.
- What is your current cash value and surrender value? If you replace your current permanent policy with another permanent policy your cash and surrender schedules start all over again. This could cause your new cash and surrender values to take several years to accumulate to the level of the current plan.
If you have any questions or would like more information about Life Insurance, contact us and we will be happy to help you.