If you are considering buying a life insurance policy make sure you know what you want your policy to do for your loved ones. The top reasons for buying life insurance are “replacing lost wages” and “covering burial expenses”. Other reasons are to transfer wealth, pay estate taxes and supplement retirement income. Both term and permanent insurance can meet these needs but they are very different products. A recent article in Forbes.com discusses the types of policies and things to consider when buying a life insurance policy.
Term insurance will provide coverage for a specified period of time. Term insurance is typically the most affordable and will allow you to purchase the most insurance for the for the lowest premium. While term insurance will only cover you for a period of time, permanent insurance can cover you for a lifetime. The premium for permanent policies is generally more expensive but it will allow you to accumulate cash.
To decide which type of policy is right for you ask yourself these four questions:
1. Why do you need the insurance?
2. How much coverage do you need?
3. What is your budget?
4. What are your other financial priorities at the moment?
Considering the purchase of life insurance? Before making the commitment, make sure you know what you want the life insurance to do for you and your loved ones. In a recent study, consumers indicated “covering burial expenses” and “replacing lost wages” were the top reasons for owning life insurance.¹ Many consumers also see value in owning life insurance to transfer wealth, pay estate taxes and supplement their retirement income.
Both term and permanent life insurance can provide for these needs, though they are very different products. Term life insurance provides your loved ones with financial protection for a specific “term,” or period of time (e.g., 10, 20 or 30 years). Term insurance is generally the most affordable type of insurance and allows you to get the greatest amount of coverage for the lowest initial premium. Where term insurance covers only a certain period of time, permanent life insurance can cover your entire lifetime, provided you pay the necessary premiums. Permanent policies also give you the ability to build equity called cash value.
Which may be right for you? To make an informed decision about the purchase of life insurance, start by asking yourself these four questions:
Question 1: Why do you need life insurance?
The main reason to own life insurance is to provide your loved ones financial protection in the event of your premature death. And as time goes by, the needs of what the insurance will provide typically evolve as well. In their early 20s and 30s, most individuals purchase life insurance to cover items such as housing, raising children and future income potential. As people move into their 40s, 50s and 60s, their focus also includes supplementing retirement, estate planning and leaving a legacy.
Question 2: How much coverage do you need?
There are numerous online calculators designed to help you determine your insurance needs. However, many of them do not take into account lifestyle impacts and your needs in the future. The best way to figure out how much life insurance you need is to sit down with a financial advisor, who will assess your needs based on your specific financial goals and circumstances.
Question 3: What is your budget?
The primary reason to purchase life insurance is to protect against the financial risk of premature death. If you have budgetary restrictions and the amount of coverage you require can only be attained today by purchasing term insurance, you should buy term insurance. The worst-case scenario would be buying insurance that is too expensive and determining shortly thereafter you cannot afford it and let your policy lapse. If term insurance is being purchased, make sure you ask if your policy can be converted to a permanent policy. Many term policies have the option to convert some or all of it to permanent insurance for a certain period of time without having to provide additional proof of insurability. If you’re beginning the buying process with budget flexibility, you can consider the full range of options—from lower-cost term insurance to permanent policies that offer more benefits.
Question 4: What are your other financial priorities at the moment?
The decision to buy life insurance should never be made in isolation. You need to consider how much money your loved ones would need if you were suddenly gone and could no longer provide for them, and determine how much you can spend on life insurance relative to other financial commitments.
While the decision is still hard asking yourself these questions will help you make the right decision. Also keep in mind that if term is all you can afford now most term policies do have conversion options. Later on when you have more money to spend you can convert all or part of your term policy into a permanent policy.