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There are many factors to consider when choosing a life insurance policy. Age, debts, income, savings, retirement accounts, and number of dependents will all influence this decision. We generally recommend a policy that covers a minimum of 10 times your annual income. However, there is no one-size-fits-all approach to life insurance, and you may wish to reassess your policy every few years or in the event of major financial changes. Taking on additional loans, mortgages, dependents, and credit card debt will warrant a review of your coverage. Because there are so many options to consider, it’s important to understand your unique needs and goals.
The primary reason why people buy life insurance is for burial or final expenses. This need for greater financial security has come into focus since the start of the COVID-19 pandemic. Understanding which financial obligations you want to cover is a crucial first step when choosing a policy. Whether your loved ones will need assistance with college, mortgages, large debts, or income replacement, the right type of life insurance will help them navigate into the future. The following are some key details about common types of life insurance.
The most basic form of life insurance is a term policy. They only pay out if a death occurs within the duration of the term and they tend to include few, if any, additional benefits. Two types of term life policies exist: level and decreasing. Level term coverage remains the same throughout the duration of the policy while decreasing term policies offer reduced coverage over time. Term life policies tends to be the most common type of life insurance. They are typically offered in renewable annual or 5-year increments, and may be limited to a specific age range around 65 years.
Another common form of life insurance is a whole life policy. This type is permanent, as it provides coverage throughout a policyholder’s entire life, regardless of age. They combine coverage and a savings account, but are usually more expensive than term life insurance. The insurance company places a portion of premium payments into a tax-deferred account which builds cash value over time. Traditional whole life benefits and premiums are created to be balanced throughout the duration of the policy. Typically, premiums are more expensive at the beginning of the policy and gradually taper down. This allows one to make overpayments while younger, paying reduced premiums later in life while retaining the same amount of death benefit.
Adjustable or universal life insurance offers more flexibility than other permanent plans. Policyholders can adjust the amount of death benefit they need and pay premiums as they wish within certain limits. These plans also link to an investment account, accruing tax-deferred interest which adds to their overall cash value. Another major perk of universal life insurance policies is the ability to withdraw or borrow funds from the account. However, withdrawal fees and changing interest rates present a notable downside. Market conditions will influence how well these policies perform, and estimated returns aren’t always guaranteed.
A number of different investment options are available with a variable life insurance policy. While cash value is not guaranteed, stocks, bonds, and mutual funds can be leveraged to grow (or shrink) the value of sub-accounts. Such policies are permanent, but less popular and more risky than other plans, though they do offer fixed premiums over their lifetimes. Variable universal life insurance is another type of policy which offers the flexibility of universal plans alongside the investment potential of variable policies.
The ideal life insurance policy will depend on your unique risk aversion, family structure, financial situation, and need for flexibility. Certain taxes apply to different states and situations, so be sure you know the applicable laws. If you’re worried about the future living conditions of your dependents, it’s probably best to choose a low-risk policy with adequate coverage. Those willing to shoulder some risk in hope of a better payout may benefit from a plan with an accompanying investment account. Either way, our agents will compare the pros and cons of different companies’ plans before helping you decide with confidence.
Life insurance provides you with peace of mind knowing that your family and loved ones will be protected when they need it most. While there are many options to consider, we offer policies from over a dozen different carriers and can certainly find the best fit for you. Please reach out and contact us for more information or a free quote today.
