Of all the life insurance plans available, which is the best for you?
If you had a decision to make that could potentially cost you hundreds of thousands of dollars, would you get a second opinion? A majority of people would probably answer that question with a “yes.” Yet, you’d probably be surprised to learn that even people who ordinarily would shop around for a television, car or other expensive items usually don’t shop at all when they buy life insurance.
Life insurance basics: The need for life insurance
First, if you don’t have anyone depending on your income and no one would be harmed financially if you were to die, then you probably don’t need any type of life insurance plan. This is obviously not the case if you have a spouse, children, parents or anyone else depending on your income. Under those circumstances, it’s wise to have an appropriate life insurance plan in place to take care of your dependents should something happen to you.
Life insurance definitions: Term insurance versus cash value insurance
In my opinion, there are two fundamental categories of life insurance policies. They are term life insurance-type policies and cash-value-type policies.
Term life insurance plans have been called pure protection, because it has no savings portion attached to it, as does cash-value insurance. If you die and have a term life insurance plan, your beneficiary gets only the face value of the policy.
There are different types of term life insurance plans. There is increasing term life insurance, in which the payment increases every year while the face value (death benefit) stays the same. There is decreasing term life insurance, which has fixed payment amounts, however the face value decreases every year or so.
Some people use decreasing term life insurance as a type of mortgage insurance, so their house will be paid off if they die while they still have a mortgage. If you decide to purchase decreasing term life insurance for this purpose, be sure that your mortgage balance and your decreasing term policy face value are decreasing at about the same rate.
Then there’s level term insurance, which features both a fixed payment amount and fixed death benefit that remain locked for a period of 10, 15, 20 years, or possibly longer.
Increasing term life insurance plans are usually cheaper the first several years than level term insurance, however eventually the annual increases will exceed that of a level term life insurance product. If you total the payments you would make for say, 20 years with an increasing term life insurance product and compare it to a 20 year level term life product, you will normally find that the total payments you made with the level term life insurance plan is cheaper even though the annual payments started out higher than that of an increasing term life product.
Shop around for life insurance
You need to shop around for a life insurance quote, because rates for and types of term life insurance plans can vary quite a bit.
The alternative to term life insurance is cash-value insurance, which is insurance with a built-in savings plan. Many types of cash-value products have been available over the years. A couple of these types of plans are whole life and universal life.
In most, if not all whole life and universal life plans, your excess premium dollars (monies you paid that weren’t needed to pay for insurance costs and expenses) were invested with that particular insurance company. These policies have historically offered very poor returns. Because of this, they weren’t good for the policyholder.
There is however, a relatively new (by insurance industry standards) type of cash-value insurance on the market called variable universal life insurance or VUL. Please check out my Variable Universal Life Insurance post for more information on this product.
From my experience, most people would be better served by buying a term life insurance plan and investing the money they would save over their whole life or universal life cash-value insurance. With a little bit of investment knowledge, most people can get a better return on their investments than they can with most of those types of cash-value insurance policies. However for some, a VUL is a better choice. I recommend getting all the facts and then sitting down with your financial advisor to see what is best for you.
To wrap up with some final thoughts, it’s normal for an insurance company to require that you pass a physical before issuing a policy. However make sure to get a policy that doesn’t require any other physicals after the initial one for the duration of that policy and for all renewals. Otherwise, if you’re asked to take physicals at the insurance company’s discretion, the onus of staying healthy so you can stay insured rests with you.
Also, keep in mind that all life insurance contracts are subject to insurance costs and other charges. These costs and charges are the basis for comparison when shopping for insurance. Also, be sure to check with a good insurance rating service to make sure the insurance company you are considering buying from is financially strong. And never cancel your old policy until the new one is in force.
If you determine that you need life insurance, you should do it as soon as possible. Waiting to buy the right life insurance plan can be a mistake because the older you get, the more it will cost you. More importantly, if you become uninsurable while you’re waiting, it can’t be purchased at any price. Someone once said, “Life insurance is like a parachute, if you ever need it and don’t have it, you’ll never need it again.”