What Type of Life Insurance Policy
Should You Buy?
“It depends on your objectives!”
In general, there are two main categories of life insurance: term
life and whole life. Term insurance
is temporary inexpensive protection and is not designed to
last forever. Whole life insurance offers iron clad long
term guarantees including cash value but is very expensive.
Included in these two categories are several variations of
each type of policy. With all the choices of life insurance
out there, it can be quite a daunting task deciding which
type of life insurance to buy.
Custom Life Insurance Quote!
When trying to determine the type
of life insurance policy to purchase, the most important question
you need to ask yourself is “what am I trying
to accomplish with this insurance.” Your
answer to
that question provides direction in identifying the life
insurance policy that best meets your needs. Following are
some of the more important questions to consider along with
some answers that should help you better understand which
policy may work best for you.
Q. What is the purpose of the insurance? In
other words, why are you buying the coverage? Or, what is your
objective of the insurance?
A. The obvious answer is “in case I die”.
That is true, but not exactly the point. Your true purpose
for the insurance may be to protect your income or to pay off
a mortgage or other loan. Or, it may be for estate planning
or business purposes. So when you think about the purpose of
the insurance, try to identify your true needs.
If you can isolate the specific reason for the coverage, you
can determine if the need is temporary or permanent. If the
need is temporary, then term life is the best policy choice.
If you must maintain coverage permanently, then whole life
or guaranteed universal life will be the way to go.
Q. How long do you need to maintain
coverage? Do you need life insurance
for the long term or just for a few years?
A. The length of time you need to
keep the insurance will determine the type of policy you
buy.
If you truly only need coverage for a short and definite period
of time, you should buy term life insurance and most likely level
term insurance. But keep in mind, over time, term
insurance gets expensive and eventually becomes cost prohibitive.
Also it is not designed to last forever and most people outlive
their term policies.
If your need is permanent then term insurance is NOT the
way to go. In other words, if you want to make sure that you
have life insurance when you die, you need to consider either
whole life or guaranteed universal life. Do not play
the game of trying to keep extending term policies over time
in an attempt to save money. If you need life insurance
for life, and you can afford it, lock-in permanent insurance
now. But make sure that your policy is guaranteed! You certainly
do not want to buy a permanent policy that does not have fully
guaranteed premiums and death benefits.
Q. How much life insurance do you
really need? The amount of coverage you need will
be a factor in determining the right policy.
A. The right kind of life insurance
for you will depend to some extent upon the amount of coverage
required.
For example, if your need for life insurance is substantial,
you most likely want to have some amount of term insurance
included in your overall life insurance portfolio. There are
two reasons why this may be the case: 1. cost and 2. 100% of
your needs are most likely not going to be permanent. That
doesn’t mean you rule out some amount of whole or universal
life coverage. There may be a way to use a combination
approach to buying life insurance. In other words,
purchase two different types of insurance (some term life and
some lifetime guaranteed coverage) depending on what your real
needs are.
If you only need a relatively small amount of life insurance,
you may just want to buy some form of permanent or lifetime
guaranteed life insurance. It may cost more than term but it
will be there when you need it most.
Q. Is building cash value important
to you?
A. While life insurance is not considered
an investment, it has tax advantages that make it a viable
place to accumulate cash.
The only term life insurance policy that builds cash value
is return of premium term insurance (ROP term).
ROP is a great option if you don’t mind paying a little
more for the opportunity to grow cash. Return of premium insurance
also offers a 100% guaranteed premium refund at the end of
the stated level term period.
If you are truly trying to build cash value, then either whole
life or universal life is the insurance policy of choice. Over
a 15-20 year period, a properly structured permanent life insurance
policy may generate an internal rate of return on your premium
stream in excess of 5% tax free. While this is not guaranteed,
many traditional whole life policies have averaged these types
of returns. Even though life insurance should not be thought
of as an investment, it is a strong asset and can be a cornerstone
of any solid financial plan. For more information see, key
tax advantages of life insurance.
Q. What is your budget
for the insurance? How
much can you comfortably afford to allocate to your overall
life insurance plan?
A. The bottom line is everything
comes down to price and affordability.
The first step is to determine
how much insurance you need. Once you know the amount of
coverage needed, you can begin to look at options in terms
of premiums.
If you have a limited budget, term insurance will almost always
be the way to go. It is inexpensive and allows you to purchase
large amounts of insurance protection without “breaking
the bank.”
The most important thing to remember is make sure you get
the amount of coverage you need without compromising. If at
all possible, do not settle for less insurance than you really
need to protect your family or business. Don’t buy a
$100,000 permanent life insurance policy for $125.00 a month
when your need is for $500,000 of insurance and you can get
a 20-year level term policy for $85.00 a month. Sure the permanent
insurance is there for the long term but what happens to your
family in the event of your death in the short run?
If your need is long term and your budget dictates, you should
purchase some amount of permanent life insurance. When considering
the type of permanent coverage, you should look
at lifetime guaranteed universal life or some form of
whole life insurance. In most cases, if you are not concerned
about cash value, the lifetime guaranteed universal life is
the best policy choice. The most important consideration with
permanent insurance is to make sure you get coverage and premium
guarantees!
Summary
Are you looking to pay as little as possible? Are you looking
to have coverage guaranteed for your lifetime? Are you trying
to build cash value? All of these questions will have a big
impact on the type of life insurance policy you need.
In order to make the best policy choice, you need to carefully
consider each of the questions above. Once you have thought
out your needs and have answered these critical questions,
you can begin to get a clear picture of what makes the most
sense. In your case, there are likely a number of potential
solutions that would adequately meet your life insurance needs.
Consulting a professional is always the best way to go and
MEG Financial can help! Call today toll free at (877)
583-3955 with questions or to brainstorm about viable options. You
owe it to yourself to get the best life insurance for you and
your family!
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