By Ben Feld
Sure, a lot of companies like to give you the ABCs of buying life insurance, but we think it’s important enough to offer a Step D as well.
No one really likes to talk or think about life insurance. But for millions of Americans, life insurance has become the cornerstone of their family financial plans. To that end, how do you determine how much — and what type — of life insurance is right for you? Let’s talk about individual, not business, life insurance.
First to consider, there are two basic types of life insurance:
Term life provides death benefit protection of the insured for a certain number of years, typically five, 10, 20 or 30. It is often called “pure” life insurance, as all of the premiums are used to pay for the coverage only; there is no cash value component.
Permanent life, often in the form of whole, universal and variable universal, provides death benefit protection but adds the potential for tax- deferred cash value. This is capital that can be accessed via policy loans and withdrawals for living benefits such as supplemental retirement income, college tuition payments, home improvements or a host of other financial needs.
Step A: Assess your immediate needs. And we do mean immediate. In fact, the best time to buy life insurance was yesterday — before you actually have a need. Because the earlier in life you can buy, the chances are the lower the premiums will be — whether for a term or permanent policy. Now is the time to learn what life insurance can mean for your financial plans. Remember, term life provides death benefit protection for a specific period of time and permanent life provides death benefit protection plus the potential for cash value to provide living benefits.
Step B: Assess your future needs. Time to have that proverbial chat with yourself. Do you see yourself getting married and having children? Are you expecting a long period of being single? Have you thought through the costs of raising a family and what an untimely death could mean to your financial planning? It is a lot to think about. But the sooner you can plan ahead, the sooner you can make a choice about life insurance and how cost-effective it may be.
Step C: Determine how much you can afford. A tricky point to be sure, but one that cannot be overlooked in your planning. Generally speaking, term life is going to cost less than permanent. So while you can buy more actual life coverage with term, that coverage will end at the end of the specified term (and sometimes will increase in cost as the policy gets down the road).
Some liken the choice of term versus permanent to the age-old question of renting versus owning. Permanent life, as noted above, does have the potential to build cash value but generally comes with higher premiums than term. But just like the question of owning versus renting, nothing is totally black and white. Term policies, for example, often offer the ability to convert to permanent. And permanent policies may not project the cash values you think you will need without additional premium at some point.
And there is what some call the “X” factor: Will you need to undergo medical underwriting at some point if you want more insurance? That will affect cost.
Step D: Find a financial professional with whom you feel comfortable. He or she will review your financial needs and wants with you, help assess what policy is right for you and navigate the differences in costs among policies. Part of this person’s job is to make sure all of your questions are answered, so make sure you ask them. Then you will feel positive about your choice of life insurance.
And since you should have started yesterday, now is most definitely the time to get started. Building the cornerstone of your financial future is too important to wait on.
Ben Feld is an adviser with 1847Financial in Conshohocken.