The available choices for life insurance can be overwhelming and may seem daunting for a layman to even begin to understand. It’s difficult to know exactly where to start.
You should start with a basic but far-reaching question: “Do you need life insurance at all?” Your intelligent answer to this question will help you decide what type of life insurance to buy. That is, assuming you do need one.
So, in case you decide you really need a life insurance, the next step is to learn about the different types of policies. This is important because you want to buy the right kind and type of insurance policy that will suit your needs. In the United States, there are hundreds of insurers that provide a life insurance.
Do You Really Need Life Insurance?
Your life insurance needs vary according to your personal situation and the situation of the people who depend on you.
If you’re alone and have no dependents, you probably don’t need a life insurance. Also, if you don’t generate a substantial part of your family income, you may or may not need life insurance.
If your salary contributes significantly to support the family, pay off a mortgage or other recurring bills, you should consider getting a life insurance. It could be a way to cover big financial obligations – like sending the kids to college – in the event of your death.
Here are the important factors you should consider when buying a life insurance:
How Much Life Insurance Do You Need?
Honestly, there’s no exact rule of thumb to follow to determine how much insurance you need. It would depend on a lot of factors such as your income, the number of your dependents, your debts and your general lifestyle.
However, there’s a conservative guideline that may prove helpful to help you decide. Consider getting a policy equal to five to ten times your annual salary at the end of your estimated life expectancy. An insurance agent would be able to compute your general life expectancy based on your lifestyle and health habits and answer any other questions.
Better yet, sit down with a financial planning professional to determine how much life insurance you actually need.
Individual vs. group life insurance
Many people can get a group life insurance through their employer. A group life insurance is a single policy covering all employees that meet certain criteria, regardless of their health condition.
It has two main advantages over an individual insurance. First, it is generally cheaper because of the rule of economies of scale. Second, there is no need for a medical examination, which is great for those with pre-existing medical condition. For people with poor health, this may be the best way to get insurance at a reasonable cost.
However, there are two main disadvantages of a group life insurance.
The insurer would often set a limit to the maximum amount of insurance you can get. For some, the amount of insurance may not be enough to cover their expected needs. (Read: How much life insurance do you need?)
It’s only in effect as long the employer offers the benefit AND the insured continues to work there. If any of the two changes, the insurance coverage would likely cease. Some companies will allow you to continue your coverage at your own expense but the premiums would tend to increase. Ultimately, you are not really in control of your coverage.
These two issues are absent in an individual life insurance policy. This is a simple policy that you can personally buy in the market; it’s not dependent on any employment factor. So whether you’re employed or not, it remains in effect as long as you pay the premiums.
For me, an individual life insurance is better for most young parents. The company insurance could just be a supplement to your own individual policy since there is no prohibition on that.
In some instances, the group life insurance could be sufficient for you OR it may be the only insurance you can get. In general, the individual policy will provide the best protection because nobody can take it away from you.
Types Of Life Insurance Policies
Life insurance policies are not always the same.
Some policies build up cash values over a long period while others cover you only for a short while. Insurance companies offer two general policies: cash value life insurance and term life insurance. Term life insurance rates usually start out quite low. Cash value life insurance rates start higher in the beginning of the policy. However, a cash value life insurance offers additional benefits, such as:
- You can borrow against your policy, that is, take out a loan. However, you must repay the loan or the company will deduct all unpaid balances and interests from the death benefits.
- You can use the cash value to buy more insurance.
- You can increase your retirement income with the cash value.
Cash Value Vs Term Life Insurance
Within these two basic types of life insurance reside different policy options. Some of them are:
Term life insurance has limited time coverage such as 10, 15 or 20 years. During that time, your premiums stay the same. After the set time, the insurance may terminate or may continue. If it does go on, the insured person usually must pay a higher rate.
Universal life insurance is a permanent insurance that offers flexibility to the insured. It allows you to lower or increase your coverage and/or your insurance premiums over time.
Whole life insurance is another permanent insurance and provides you with lifetime coverage. It has a fixed premium and it builds cash value. The cash value acts like a savings account and it has a tax-deferred feature.
This type of insurance is usually expensive because the companies claim their huge commissions and fees in the early years. As a result, there’ s very little excess funds left to build up the cash value. The companies worked these fees into the complicated investment formulas such that buyers do not see them at all. Chunks of money from their fees actually go into the pockets of the insurance agents, unit managers and agencies.
Variable life policies are another form of permanent insurance you can look into. They build up a cash reserve that you can invest in any of the choices that the insurance company offers. The value of the cash reserves will depend on the performance of these investments – the better they do, the higher the cash reserves.
In universal life insurance, you can vary the amount of your our-of-pocket insurance premiums. You do this by using part of your accumulated earnings to cover a portion of the insurance premiums. You can also modify the amount of death benefit to your beneficiary. However, this kind of flexibility is not at all without cost – you have to pay higher administrative fees.
How To Choose A Life Insurance Company
When it comes to choosing an insurance company, the primary consideration is whether you trust them enough with your money. Especially in the US where there is no social security blanket, the insurance company you choose is extremely important. After all, it will play a significant role in securing your (and your family’s) financial future and wellbeing.
So, you have to make sure that when picking an insurer, you are making the correct, informed, well-researched and prudent choice.
Here are some things to help you hunt for the most suitable company for your insurance needs:
Don’t get caught up in a company’s expensive and flashy marketing campaigns and advertising – be discerning.
Often, newer insurance companies spend millions to make their presence known in the market but you should check track records. An established company that has been in business for a time is the better choice than aggressive new companies.
Each state has an insurance department that regulates and monitors the licensed insurance companies for financial health and compliance. They try to prevent insurer insolvencies or the inability of the company to pay off the benefits to their customers.
Still, many insurance companies fail from time to time. So, before you buy from a company, make sure that you do an evaluation of the insurer’s financial condition.
Premium And Cost
The premium is the amount you regularly pay to your insurance company for the cost of your insurance policy. You will notice that for the same death benefit and type of insurance (ex. term life), the premium will vary among different companies. This is because some policies have features that others do not carry or because some companies just charge higher rates.
Do not take this factor lightly because it is very important when it comes to insurance policies. Observe the attitude they have towards potential clients like you and how good is their customer service system.
Are they easy to contact and able to attend to your queries whether in person, over the phone or online? Do they patiently listen to understand your financial needs or do they just seem too eager to make a sale? Since you will have to deal with your insurer for many years, it is important to get one that treats their customers well.
The Bottom Line
The Internet is your best friend when it comes to choosing a life insurance company. You can learn the basics of insurance, find a good broker and have a professional insurance advisor evaluate the policy offers. You can do all these with just a few clicks on your computer.
Suze Orman, a world-renown financial advisor advises that if you want insurance, buy term, if you want an investment – buy an investment. Do not buy insurance and don’t ever mix the two (See Life Insurance as an Investment). Unless you’re a financial whiz and understands all the complexities of the various types of life insurance policies, you should stick with term life insurance.