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Life Insurance: Understand Your Choices

Picking a life insurance policy is a complicated decision, so it’s important to research each choice and consider your needs.

Let’s jump right in. When it comes to getting a life insurance policy, there are two types: 

  • Term life insurance covers you for a set term, typically from 5 to 30 years, as long as you pay premiums. If you die during that term, your beneficiaries receive the payment amount. If you’re alive when the policy expires, the insurance coverage ends. You no longer pay premiums and you don’t receive any payout from the insurance company. A convertible term policy allows you to switch to a whole life policy when your term insurance ends, but your premium will rise. 
  • Whole life insurance covers you for your entire life, and pays the insurance amount to your beneficiaries. Varieties of whole life insurance include straight life, universal life, variable life and variable/universal life. Talk to your CPA or an insurance professional for more details. Unlike a term life policy, these policies feature an investment element. Your insurance premiums include not only the cost of the insurance but also an additional amount that is invested and that grows tax deferred over the life of the policy. You can borrow against this amount and any loans are deducted from the benefit your beneficiaries receive when you die.  

3 Questions to Ask About Life Insurance 

Picking a life insurance policy is a complicated decision, so it’s important to research each choice and consider your needs. Here are three basic questions to address.   

1. How much does it cost? The monthly premiums for a term life insurance policy are generally lower than for a whole life policy. One concern, though, is that if you want a new term life policy when the old one expires, you may have to pay more. That’s because life insurance premiums are based at least in part on your age and health. Say you buy a 30-year term life policy when you are 30 and the term expires when you are 60. At that point, your premiums for a new policy will likely be higher since you are much older and may have more health concerns than when you bought the first policy. The premiums for a term life policy should stay the same for the entire term, but they may decline under a decreasing term policy.     

Whole life policy monthly premiums are typically much higher, but these policies are meant not to expire, so you won’t pay more for insurance later in life. When you die, your beneficiaries receive the cash value of the savings you have accumulated over time.  

2. What are my goals? If you would like to use insurance to give your heirs a certain amount when you die, whole life is the most reliable option. Remember, though, that insurance is not your only investment choice and that you may get better returns from another investment vehicle, such as stocks and bonds or a wide range of other investments. Research your other investment options to see which one you believe will perform best—and offer you and your heirs the best return—over time. The main question you want to answer is which option will give you the most flexibility and leave your heirs the largest legacy, if those are your goals.   

Term life is often considered a good choice for replacing if necessary your income over a certain period. For example, say you want your family to have $200,000 to pay off your mortgage or send your kids to college in 25 years. You know that will be difficult if you die in the meantime and your income is lost, so you buy a $200,000, 25-year term life insurance policy. When the policy expires, you may no longer need life insurance, since you will have paid for the mortgage and college and built up other investments for retirement or other needs over time.  

3. How should I choose an insurance company? Companies like A.M. Best, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Ratings Services rate insurance companies based on their financial stability. These ratings can be found online. You can also turn to your state insurance company for information on complaints against different insurance companies. Make sure that the company has a good range of choices for the type of insurance you need and that its rates compare favorably with other options.