Important Considerations When Choosing the Right Life Insurance Plan
Just about everybody needs life insurance. Unless you are in the top 1% and have enough in savings and investment to cover final expenses and allow your family to maintain the same standard of living, it is best to maintain some level of coverage. Deciding which type of policy to purchase can be confusing, however, and there are some factors to keep in mind when you begin shopping.
There are two general forms of life insurance to choose from; permanent life insurance and term life insurance. The one you choose will depend on your specific circumstances, needs and goals.
When to Consider Term Life Insurance: Term is the simplest form of life insurance. For a set annual fee (often broken down into monthly payments), you purchase a policy that pays a death benefit for a specific period of time. Typical policies have terms of 10 years or 20 years; or if obtained through an employer, they are typically valid for as long as you are employed by the same company.
Term life insurance is a good option for:
Temporary Income Replacement: When you are working and raising a family, it is up to you to keep a roof over your heads and food on the table. But if you are the main breadwinner and something should happen to you while your children are still minors, it could become a major financial hardship for your family. A term life policy with a length of 10 or 20 years can provide assurance that this financial burden is lifted in the event of a worst case scenario.
Budget-Conscious Consumers: There is a significant difference in cost between term and permanent life insurance. For example, a 35-year old female non-smoker who is in relatively good health can expect to pay around $50 per month or less for a $500,000 20-year term life policy. For a permanent life policy, it could cost that same individual with the same level of coverage anywhere between $300 and $500 per month (or more).
When to Consider Permanent Life Insurance: Permanent life policies are far more complex and can be used for much more than just life insurance. They are often used to save money, as an investment vehicle, tax reduction strategy, estate planning, and much more. As the name implies, the main difference between term and permanent life insurance is that term life insurance has a future expiration date. Another major difference is that with permanent insurance, the policy builds cash value over time, which can be borrowed against or even cashed out if needed.
Permanent life insurance is a good option for:
Long-Term Coverage: If you want a policy that will be in force for as long as you live, permanent insurance is the way to go. Coverage stays in force even if you live to be 100, so you can be assured that your heirs will collect a death benefit at some point in the future.
Saving and Investing: There are numerous ways to use permanent life insurance as an investment vehicle. If you are more conservative, you can opt for a guaranteed return with a whole life policy. If you are more adventurous and want to shoot for higher returns in stocks, bonds, equity funds, etc. you can choose a variable life insurance policy. Just be warned that poor returns on investment can severely impact the cash value and death benefit of such policies.
One thing all life insurance plans have in common is the tax-free death benefit. This means whatever the level of coverage you have, you can be assured that every dollar of it will go to your loved ones, and not one penny is taken by the government.
Choosing the right life insurance plan ultimately comes down to your individual needs. And with so many options, it is best to speak with an expert who can help sort through all the choices to find the best plan for you and your family. Independent life insurance agents are best equipped to provide this type of guidance in an objective manner. Because they are not captive to any single insurance carrier, they are able to shop life insurance plans for you among the top insurers in your state, saving you time and money.