“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.
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!
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!