Determining Your Life Insurance Needs
Considering life insurance can be a daunting task, but understanding your coverage needs is crucial. The first step is to assess how your beneficiaries would utilize the death benefit. Common uses include:
- Daily living expenses for dependents
- Recurring and non-recurring bill payments
- Costs associated with raising children, including college tuition
- Debt repayment
- Final expenses such as medical and funeral costs
Adam Winslow, CEO of Direct Line Group, notes that people often underestimate their life insurance needs. “They consider the basics, like mortgage payoff, but fail to account for ongoing expenses, costs of raising children, and college tuition,” says Winslow.
The most effective approach is to use a life insurance calculator for an initial estimate, then consult with an experienced financial advisor or insurance agent to determine a specific amount. Methods like the DIME method may be suggested, but they can be flawed, potentially leaving you over- or underinsured.
Choosing the Right Type of Life Insurance
After determining your coverage needs, you’ll need to decide on the type of life insurance policy. The two primary types are term life and permanent life insurance.
Term Life Insurance
Term life insurance is typically the most affordable option. With a traditional term life policy, you choose a level term period (e.g., 5, 10, 15, 25, or 30 years) during which your premium remains constant. If you die during this term, your beneficiaries receive the death benefit. If you outlive the policy, there’s no payout unless you have a return of premium policy.
Key features to consider for term life insurance include:
- Guaranteed renewability, allowing policy renewal after the level term period, though at a significantly higher rate
- Term life conversion option, enabling you to convert to a permanent policy within a specified timeframe or age parameter
- No-exam life insurance, a convenient option for young, healthy buyers
Permanent Life Insurance
Permanent life insurance is more expensive but provides lifetime coverage and includes a cash value component. Types of permanent life insurance include:
- Whole life: Offers a fixed rate of growth and level premiums
- Universal life: Cash value growth varies with investment performance, and premiums may be flexible
- Variable life/Variable universal life: Cash value growth is tied to investment performance, with potentially flexible premiums and death benefits
- Indexed universal life: Cash value growth is linked to a specific financial index
- Burial life: Designed for final expenses, with a small cash value and level premiums
Customizing Your Policy with Riders
Many life insurance policies offer riders that provide additional coverage or benefits. Common riders include:
- Accelerated death benefit rider
- Child life insurance rider
- Disability rider
- Early-enhanced cash value rider
- Lapse protection rider
- Long-term care insurance rider
- Return of premium rider
- Spouse life insurance rider
- Waiver of premium rider
Carefully weigh the benefits against the costs when considering riders.
Shopping for Life Insurance
Compare multiple life insurance quotes to find the best coverage at the right price. Factors affecting life insurance rates include age, gender, coverage amount, health, family medical history, and lifestyle habits. Working with an experienced independent insurance agent can help identify the best insurers and policies for your needs.
Top Life Insurance Companies
Some of the top-rated life insurance companies include:
- Pacific Life: Best Overall
- Protective: Best for Indexed Universal Life Insurance
- Prudential: Great for Reliable Policy Illustrations
- Lincoln Financial: Great for Variable Universal Life Insurance
- MassMutual: Best for Financial Strength
- Nationwide: Great for Young Adults
- Mutual/United of Omaha: Best for Investment Performance
- Penn Mutual: Best for Universal Life Insurance
The Application Process
Once you’ve selected an insurer and policy, you’ll need to complete the application. Be prepared to provide detailed personal and medical information. Honesty is crucial to avoid application rejection or future policy issues.
The application process also involves specifying your beneficiaries and may include a medical exam.
Finalizing Your Policy
After your application is approved, review the final policy details carefully, ask questions, and ensure you understand the terms. You’ll have a “free look” period, typically at least 10 days, to review and potentially cancel the policy for a full refund.
