Choosing A Life Insurance Policy To Meet Your Needs

By: B. Jayne Levy, LUTCF

There are many factors to consider for a person looking to purchase life insurance. Some of them are: What type of policy should I purchase? How much insurance do I need? Who should be my beneficiary?

When purchasing a policy always ask, “What type of policy should I buy?” All life insurance falls into two types of coverage: Term and Cash Value. Understanding the characteristics, advantages and disadvantages of each is key to choosing a policy for your needs.

Term Life Insurance is a policy purchased for a set (term) such as 10, 15, 20 years. It is best suited for temporary needs. The most notable feature of a term policy is that it does not build cash value. Below are some of the characteristics, advantages and disadvantages of a term policy.

Characteristics:

  • Provides temporary protection for the term of the policy.
  • If the insured dies within the term period, the insurance company pay the death benefit.
  • If the insured survives the term period, the coverage terminates.

Advantages:

  • Low initial premium.
  • Well-suited for temporary needs.
  • Plans may be renewed, based on medical qualifications.

Disadvantages:

  • Premiums may become more expensive in the future.
  • Insured may outlive policy.
  • Does not build cash value.

Cash Value Life Insurance provides lifetime protection for the insured as long as the policy is kept in force. These plans build cash value that can be used during the insured’s lifetime. They also offer fixed or flexible premiums. Types of cash value policies are:

Whole Life:

  • Fixed, level premium payments.
  • Cash values accumulate at a guaranteed rate of return as long as policy is kept in force.
  • The insurance company promises to pay a guaranteed death benefit.
  • Death benefit may not keep pace with inflation.

Universal Life:

  • Lifetime insurance protection.
  • Premium and death benefit flexibility. Premiums may increase with age.
  • Cash value accumulations reflect current interest rates with a minimum guarantee.
  • If interest rates are low, cash value growth may be disappointing.

Indexed Universal Life:

  • Lifetime insurance protection.
  • Premium and death benefit flexibility. Premiums may increase with age.
  • Potential to earn higher cash value growth when equity markets are strong, while still guaranteed minimum interest rate when equity markets are down.
  • Cash value growth may be disappointing during downturn in equity markets.

Variable Life:

  • Guaranteed lifetime insurance protection.
  • Fixed, level premium payments.
  • Select from a variety of investment options for cash value accumulations.
  • No minimum guaranteed cash value. Cash value available is based on the performance of investment options selected.
  • Positive investment performance may result in death benefit keeping pace with inflation.

 Variable Universal Life:

  • Policy payments can be increased or decreased by policy owner.
  • May offer several death benefit options, including a fixed level or variable level dependent on performance of investment options selected.
  • Select from a variety of investment options for cash value accumulations.
  • Cash values are not guaranteed. Based on performance of investment options selected.

After settling on what type of policy fits your needs, the next logical question becomes, how much life insurance do I need? In answering that question, you need to identify your reasons for purchasing life insurance. While it’s true the policy can’t replace you, it can:

  • Help your family pay for your final expenses
  • Replace all or a portion of your income
  • Keep your family in their home
  • Cover financial emergencies
  • Provide a child and/or home care fund

Therefore, the best way to determine the amount of life insurance you will need is to consult an insurance professional. He/she will assist you in answering this question by performing an analysis of your family and financial situation as well as your financial goals and objectives.

After settling on the type of policy best fits your needs and determining the amount of life insurance to purchase, you will need to name a beneficiary. Simply put, a beneficiary is the person who the insurance company pays in the event of your death.

There are two types of beneficiaries: Primary and Contingent.

  • Primary Beneficiary: Is the person or entity that receives the insurance payout when you die. You can name a person or charity as your primary beneficiary. It is possible to have more than one primary beneficiary.
  • Contingent Beneficiary: Is the person who receives the insurance payout if the primary beneficiary is unable to receive it; i.e. they predecease the contingent beneficiary. It is also possible to have more than one contingent beneficiary.

Naming a beneficiary is not as cut and dry as it may sound. There are many factors to be taken into consideration including tax consequences. Ask yourself, who will suffer the most financially from my death? Spouse? Children? Partner? Parents? It’s important to take time and put a lot of thought into naming your beneficiaries. Also, it’s important to periodically reexamine your choice of beneficiaries.

Without a doubt, purchasing life insurance when you are young and healthy allows you to purchase an affordable policy that will provide peace of mind as you go through life. Orator and Statesman, Benjamin Franklin, famously said, “If you fail to plan, you are planning to fail.”

"People by life insurance because they want to protect the dreams they share with their loved ones."