Which Life Policy is Right for You

Making the decision to buy life insurance, while monumental in terms of its importance in your financial life, is nowhere as difficult as making the decision as to which life policy is right for you. For most people the decision to buy life insurance is a matter of course, it’s what responsible and loving people do. But few people are prepared for the process involved in selecting a life policy that is best suited for their needs.
The complexities of life insurance as a product are compounded by the sheer number of different types of products from which people must choose. The process can be greatly simplified when you have a thorough understanding of your own particular needs, concerns, priorities, and outlook on your future. With that, you should be able to quickly narrow your choices to find the right policy for you.

A Policy to Meet Your Need

When the need for life insurance is recognized the process for buying a policy should begin with an in depth discovery of what exactly you want your life insurance plan to do for you. That requires an honest assessment of your current financial needs (i.e. debt obligations, income replacement needs, family goals such as college education for the kids). Equally important, it requires a vision of the future for your family to determine the time horizon for your life insurance need.

Many people make the very costly mistake of assuming that the need for life insurance will suddenly disappear once their kids are fully grown. So, they will buy a 10 or 20 year term policy only to realize after it expires that their family still has the need for protection, even into retirement. It is more common than not for a family to reach that point and find that they haven’t accumulated enough savings; or that one of the spouses is not equipped to earn the kind of income on their own; or, perhaps, they have a special needs situation in which a family member continues to be dependent on current income. It becomes tragic, when that moment arrives only to find that you are no longer insurable, or that your insurance costs have become prohibitively expensive.

A Policy for Your Future

The life insurance decision is not just about protecting the here-and-now. It is about protecting your family’s future, and whatever it holds. And, because no one can predict the future, it makes little sense to predict when the need for life insurance might end. Like fixed annuities, Life insurance is as much about protecting your insurability as it is protecting your family.

When placed in this context, the choice of life insurance policies comes down to how you envision your future. If you envision an ongoing need for life insurance then your choices will come down to a permanent form of life insurance, such as whole life, universal life, or variable life. If, however, you are fairly certain that your need will diminish over time because you will have accumulated enough capital on your own, or your family won’t require much in the way of additional capital after your death, then you can get by with a term policy. With some term policies, you could have an option to renew the coverage in the future with the understanding that your cost of insurance will have increased significantly.

If your choice comes down to a permanent form of life insurance, your decision should be based on your budget, your tolerance for risk, and your outlook on future financial and economic conditions.

You Should Consider Whole Life if….

You are adverse to risk, or you prefer to have some predictability and stability for your life insurance plan. Whole life provides a level death benefit that is guaranteed as long as the premiums are paid. A portion of the premiums, which are fixed and guaranteed, are applied to the cost of insurance and the balance is left to accumulate, tax deferred, in a cash value account. Over time, your cash value build up, which is also guaranteed, can be sufficient to offset the premium payment so that your out-of-pocket expense is substantially reduced or eliminated. From that point on, your whole life insurance policy is guaranteed to last as long as you do.

You Should Consider Universal Life if….

You recognize that your need for life insurance may continue well into the future, but you want to keep your initial costs of a permanent policy as low as possible. The death benefit is level but the premium payments may be adjusted depending on the growth of the cash values. The cash values are credited with a current interest rate which can fluctuate. If the growth of the cash value is not sufficient to support the death benefit, you may be required to increase your premium payments. Because, universal life policies don’t have all of the guarantees of a whole life policy, the premiums are substantially lower.

You Should Consider Variable Life if….

You understand investments and like the idea that your cash value growth can be tied to the performance of the stock and bond markets. The faster your cash value grows, the sooner your policy may be able to pay for itself. Conversely, with the potential for higher returns comes the potential for greater risk in that your cash values can also decreased when the market declines. The death benefit is guaranteed, however, so there is no risk to your beneficiaries.

You Should Consider Term Life if….

You are convinced that you will be able to sustain the protection of your family’s financial security using your own resources at some point in the future. For many people, their choice is limited based on budgetary concerns. Term life is the cheapest form of life insurance and is affordable for anyone who has a need. The important thing is to have the protection. When the budget allows, you could also consider a “blend” of policies that combines a term policy with a permanent policy. You could buy two separate policies, or a permanent policy with a low death benefit that includes a term rider. With some whole life plans, you can use your dividends to purchase additional paid up insurance that will gradually increase your permanent coverage over time.