Everything You Wanted To Know About Life Insurance, But Were Afraid To Ask
Buying your first life insurance policy can be a little intimidating if you are going in cold. How will you know which type of policy is the best? Isn’t life insurance, life insurance? How much coverage is enough, and how much can I afford?
There are all kinds of questions to weigh before closing the deal, and that’s why we’ve put together this quick guide for deciphering the terminology you’re likely to see.
Different Life Insurance Policies
There are a few different types of policies for permanent life insurance, and which type you end up purchasing matters significantly depending on what your financial goals are. While all have a death benefit that goes to your beneficiaries should the worst happen, some have more bells and whistles, and those can be well worth the extra cost. Here are the main types you need to know about:
Whole life insurance: This is a type of policy where part of the premiums go in a savings account. With whole life, you’re guaranteed a specific death benefit, but the policy actually builds cash value over time, and that can be drawn from while you’re still alive to cover expenses that you may not be able to handle out-of-pocket.
Universal life insurance: This is a type of policy where part of the premium goes in a savings account that you can affix to an adjustable interest rate. Many prefer whole life because with a universal policy, there is less of a guarantee regarding the money you end up with.
Variable universal life insurance: The typical first-time life insurance customer tends to avoid these policies because they can be riskier than the other types. By “riskier,” we mean that the savings feature is tied to the stock market, so you could end up with more or less depending on market performance. The current volatility of the market has led many to avoid this option, but it could be a good call for the right person.
Term life insurance: If cash value is what you’re shooting for, then you will want to stick with the above policies. A term life has none. However, it is less money, and you can get a higher death benefit to cover your beneficiaries for the length of the policy. Once the policy is up, however, you won’t walk away with anything but your peace of mind.
When deciding which life insurance policy that you want, first consider your purposes. Are you looking for a safety net/low-risk investment? If so, you will want to stick with whole and universal life. If you don’t mind taking a few chances, then the variable universal life could be more your speed. If you just need a safety net in the event of a fatal accident and can’t afford a hefty premium, then term life is your go-to.
Buying Life Insurance: What To Do, What Not To Do
Do put in some legwork. Figure out what your family might need in the event that you’re no longer around. Do you want to leave them with enough to pay off debts and a financial cushion, or would you rather have enough to replace your salary each year over a certain period of time? There are calculators online that can help you determine your needs tailored to your specific situation. They’re free. Take advantage.
Do protect yourself legally. This may seem like a no-brainer, but make sure that the person you’re buying from is licensed to do business in your state. With so many people buying insurance products over the Internet, it’s important for customers to realize that life insurance is regulated at the state level.
Avoid depending on your employer. So many Americans rely strictly on the job benefits that their employer provides. They don’t realize that their crisis planning could be canceled at their company’s discretion. While many workplaces provide a small life insurance policy for their employees, your family will likely need more than that to survive, and you don’t want to leave them hanging.
Finally, avoid overlooking life insurance for stay-at-home parents. Stay-at-home moms and dads bring so much to the table. Childcare is very expensive, and if something were to happen to the primary childcare giver, then the lack of those contributions would take a significant bite out of your household budget. It’s a job with a high dollar-value. Make sure you value it correctly and purchase a policy that adequately represents it.
Life insurance is one of the essential financial products for families and, yes, individuals. Each day that goes by where you don’t have a policy in place, is a day where you’re leaving loved ones at risk. But before you buy, weigh your options, consider your goals, and make the decision that is right for you.