Choosing Life Insurance
Ask yourself the following questions:
- How much of the family income do I provide?
- If I were to die, how would my survivors, especially my children, get by?
- Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?
- Do I have children for whom I would like to set aside money to finish their education in the event of my death?
- How will my family pay final expenses and repay debts after 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 death?
- How will inflation affect future needs?
Some insurance experts suggest that you purchase five to eight times your current income. However, it is better to go through the above questions to figure a more accurate amount.
All policies are not the same. Some give coverage for your lifetime and others cover you for a specific number of years. Some build up cash values and others 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. There are two basic types of life insurance: term insurance 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 cash value life insurance 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 up cash value.
You can renew most term insurance policies for one or more terms, even if your health has changed. Each time you renew the 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 be able to trade many term insurance policies for a cash value policy during a conversion period even if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term insurance.
Unlike term insurance, all permanent policies remain in place as long as the premium is paid. They also all have a cash value component that increases over time and allows the owner to borrow against that cash value. Because of the savings element, premiums tend to be higher. There are four types of permanent life insurance:
Whole Life Insurance
- Offers a fixed premium for the duration of the policy, guaranteed annual cash value growth and a guaranteed death benefit.
- Does not provide investment flexibility and, once established, you are not allowed to change the policy coverage.
Universal Life Insurance
- Allows the policyholder to determine the amount and timing of premium payments (within certain limits) and to adjust coverage levels as needs change.
- Includes guaranteed annual cash value growth but no investment flexibility.
Variable Life Insurance
- Allows allocation of investment funds across stocks, bonds or money market accounts with different levels of risk and growth potential.
- A minimum cash value is not guaranteed because of market fluctuations, and coverage amounts cannot be changed.
- Exposes the policyholder to greater market risk, but has the potential for greater long term returns compared to whole or universal life insurance policies.
Variable Universal Life Insurance
- Combination of variable and universal life insurance.
- Offers the most flexibility (compared to other permanent life insurance options) with the ability to vary premium payments, investments and coverage amounts.
- Allows investment in a variety of market products chosen by the policyholder and may allow policyholders to make tax-free transfers among investments.
- Exposes the policyholder to greater market risk than whole or universal life policies.
A number of factors may affect life insurance premiums:
- The age you purchase your policy. The older you are, the more expensive the premiums.
- Your overall health. Life insurance companies typically ask you about your medical history, request access to medical records and even obtain blood and urine samples for testing.
- Pre-existing and/or chronic health problems, such as diabetes, heart disease, cancer or sexually transmitted diseases may prevent you from getting life insurance or increase your premiums.
- Poor health habits, such as smoking and excessive drinking. Be aware that insurance companies may look back and consider these behaviors for the past five years.
- Engaging in dangerous hobbies, such as skydiving, skiing or rock climbing.
- Your driving record, including accidents, DWI/DUI citations, claims and tickets. The better your driving record, the better the rates you may receiving for life insurance.
- Your geographic area. Life insurance companies have access to regional data on mortality rates and life expectancy and they use that data to calculate the rates they offer.
Some of these factors are in your control. Others are a function of your genetics, occupation or location. Either way, it's important for you to be educated on these issues so that you can make the best insurance decisions to fit your life.
View the NAIC Life Insurance Buyer's Guide here.
NAIC Consumer Alert: Retained Asset Accounts and Life Insurance - What Consumers Need to Know About Life Insurance Benefit Payment Options