What is the best type of Life Insurance for me?
This is a question I get quite frequently, and the answer lies in the unique situation of every client I meet with.
Choosing the best life insurance is less about cost, and more about why, when, and for how long a client needs this type of protection.
Life insurance is not only the cornerstone of a solid financial plan, but it’s hands down one of the most cost effective ways to protect the people who depend on you financially.
What would happen to your family if you were to die prematurely? Would they be able to maintain their current lifestyle?
Would your kids be able to go to college? Would your spouse be able to shoulder the load with one income?
If you have a child, are married, or you are carrying any kind of debt, purchasing life insurance is an important consideration.
If all three, well, hopefully you already have life insurance. Here are a few other reasons to have life insurance though:
- charitable donations
- pay federal death and estate taxes
- create an inheritance for your heirs
- pay final expenses
The different types of Life insurance
Generally speaking, there are two main categories of life insurance. Term life insurance, and Whole life. They both serve different purposes, and it’s important to have a clear understanding of how they are different from each other.
What is Term life insurance?
Term life insurance provides coverage for a certain time period. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.
You choose the term when you buy the policy. Common terms are 10, 20 or 30 years. With most policies, the payout, called the death benefit, and the cost, or premium, stay the same throughout the term.
When you shop for term life:
- Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.
- Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.
Ideally, your family’s need for life insurance will end around the time the term expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.
What is Whole life insurance?
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating.
You can borrow money against the account or surrender the policy for the cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.
Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:
- The premium remains the same for as long as you live
- The death benefit is guaranteed
- The cash value account grows at a guaranteed rate
Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.
How much life insurance do I need?
A mistake that we often see people make is basing their life insurance coverage on a guess, or just grabbing a number out of thin air without realizing what the impact of inflation could have on their life insurance proceeds.
One of the benefits of working with an independent advisor like myself is that I can sit down, and through a comprehensive needs analysis, determine the exact amount of coverage you will need to protect the people who depend on you.
The amount of coverage you need depends on a number of different variables.
Here are a few examples:
- how many children you have
- your future earnings potential
- whether or not you’re married
- spouses future earnings potential
- you and your spouses age
- amount of debt you have
What to do next?
Click the button below to get started on your Life insurance needs analysis and quote process. This will allow us to decide whether or not a Term policy is suitable, or a Whole life product.