The toughest goal to overcome in buying life insurance may simply be convincing yourself that you need it. In tough economic times, it’s tempting to cut an existing policy or to dismiss the idea of getting a new one. After all, you're never going to die, right? Uh, actually. You are. We all are. And, if we're lucky, there will be people we love left behind. Life insurance isn't about you. It's about them.
Conventional wisdom suggests looking into a life insurance policy before age 30 when your health is good and you likely have no pre-existing medical conditions. An additional advantage of buying your policy at a young age is the ability to lock in lower premiums, perhaps until age 65, a significant long-term savings. If you don't want to think about this kind of coverage for any other reason, consider a sobering fact. The average cost of a funeral in the United States ranges from $12,000 to $15,000. (Cremations are less expensive at $1,700 to $2,500, but not all families are comfortable with that option.) If you die, will your final arrangements financially strap your loved ones?
An additional consideration is the fact that many newer life insurance policies are designed in such a way that they can be converted later in life to deliver long-term care benefits. Such a provision could provide peace of mind to you and to your loved ones and give you greater control over how you will live for the duration of your life and with what quality of life.
Once you have reached the decision to purchase a life insurance policy, you will need to understand the two major types of coverage available:
Whole Life Insurance
These policies remain in place throughout your life and are maintained through yearly premium payments. Coverage can only be terminated if the premiums are not paid. In addition to a death benefit, whole life policies carry "living benefits" including cash value accumulation and earned dividends. This gives the holder the option to borrow money against the policy value, thus making the policy an equity generating vehicle.
Subsets of whole life policies include:
- Traditional: These policies offer a set annual premium, minimum cash value, and minimum death value. Most are dividend earning, which can be converted to increased cash and death benefit values.
- Universal: Such coverage allows for variable yearly premiums and carry a guaranteed premium maximum with minimum guaranteed cash and death benefit. These policies earn interest, not dividends.
- Variable: Only look into these policies if you are highly financially savvy and tolerant of high risk. The cash value of the policy depends on the investments to which it is linked. This is a sophisticated form of insurance and not for the neophyte.
Term Life Insurance
Term life policies are in place for a stated period or "term" and are less expensive with fewer benefits and no accrued value over time. The premiums do typically increase in stated increments, for instance every five years. In most cases, term insurance augments your permanent insurance during "high need" periods. Such times may range from temporarily engaging in a high risk activity or job to extra coverage while children are small. The policy carries a guaranteed death benefit, but no additional benefits.
In assessing the future needs of your family, think of such things as the:
- cost of burial,
- estate taxes,
- outstanding debts,
- cost of a college education,
- and living expenses while the surviving spouse finds a job.
As in all cases of insurance coverage, research is your best friend. Talk to qualified professionals. Avail yourself of online tools. Get multiple quotes. Calculate the total cost of the policy into your current living expenses. And above all, do not move forward until you are absolutely certain you know what you are doing. Decisions that are penny wise in the present can prove to be pound foolish in the future.