Choosing a life insurance policy to fit your needs takes research. However, if you understand the basics of life insurance and let your individual situation be your guide, you should be able to select a policy that you can afford and that will protect your family when you die.
Step 1
Decide if you need life insurance. If you have children, a spouse, a parent or anyone else who depends on you financially, your unexpected death could affect your family's finances in a major way.
Step 2
Consider the cost. Determine how much you can afford to pay for insurance premiums. Weigh the cost against the protection it will provide your family in the future. Think about whether you will be able to pay the premiums over time. Some policies have premiums that increase periodically.
Step 3
Ask yourself how much life insurance you need. Factor in the number of dependents you have, other sources of income your family would have, amount of debt you owe and the type of lifestyle your family leads. According to Jeff Rose, a certified financial planner and cofounder of Alliance Investment Planning Group, calculate the total annual income your spouse and children would need if you were to die and for how long they would need it.
Step 4
Insure the most significant risk first. Think about whether your death or the death of your spouse would cause the family the most financial difficulties. Then decide whether your beneficiaries would benefit most from guaranteed death benefits distributed in a lump sum or from an insurance policy that builds cash value. Investment policies come in different forms. Some policies offer a guaranteed return while others are based on a company's performance allowing policyholders to share in the profits.
Step 5
Review the terms of different kinds of policies. Although your goal is to purchase the right kind of coverage, the many different types of life insurance policies available can be confusing. A whole life insurance policy is more expensive to purchase than term life insurance. Some policies have investment potential and others accumulate cash value that can be borrowed against.
Step 6
Make a decision in regard to for how long you intend to keep a policy. Select a term life insurance policy if you only want to pay for premiums for fewer than 10 years. If you can pay premiums for 20 years or more, whole or permanent life insurance offers a death benefit and cash value. While the premiums for permanent insurance are higher than for term life insurance, you have an investment that grows. The longer you pay on the policy, the more cash value it earns in dividends or interest. Cash value cannot be paid to the beneficiary; it can only used by the policy owner while the insured is alive. Loans against cash value reduce the amount of the death benefit unless they are repaid.
Step 7
Compare rates. Get life insurance quotes from at least three sources. Find out if a life insurance policy is renewable. Don't buy until you have compared the terms and rates of different kinds of insurance policies. A term policy policy that offers low rates but only for a limited term could cost you more money over time.
Tips and Warnings
- You can get term life insurance at lower premiums, but a term policy does not accumulate cash value. If your primary purpose for buying life insurance is to provide for your family's normal standard of living should you die, term life insurance is probably the better choice. Universal and variable life insurance policies are other options available to investors willing to take more risk. Different from traditional whole life insurance, premiums for univeral life insurance can vary. These types of policies offer maximum guaranteed premiums and minimum guaranteed death benefits and cash values. Review your insurance needs with your agent at least once each year. Any changes in your life or family situation could affect your insurance needs so that you may have to change the provisions you make for your family. Marriage, divorce, a new baby or the purchase of a new home can affect the decisions you make related to life insurance.
- The face value and cash value of a whole life insurance policy are different. Face value is the amount of the benefit paid to beneficiaries upon your death. The death benefit will be reduced by any unpaid premiums or unpaid loans taken against the cash value. You will receive the cash value of the policy if you cancel it before you die.
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