You know you should buy life insurance but you’re not sure where to start, right? There are a lot of options and you might not know how to choose the right one. All you’re really looking for is for your family to be financially stable if something happens to you, right? If that’s the case, use this guide to help you find the right life insurance policy for you.
Why are you buying Life Insurance?
This may sound like a silly question but it’s actually pretty important. There are a variety of reasons people choose to purchase life insurance and the reason will steer us toward the right type of policy. For example, if your primary reason is to payoff your mortgage that currently has 25 years left, a policy which provides coverage for 25 years would make sense. If your goal is to have a policy which will pay for final expenses, a policy which provides coverage for your entire life, no matter when you pass away, makes sense. The first question we need to answer is whether your life insurance need has a specific end date or if you need coverage for your entire life.
Term Life Insurance
If your life insurance need has a specific end date, term insurance is a good option for you. Term insurance is much cheaper to purchase than life insurance which lasts your entire lifetime because the insurance company is betting that you’ll outlive the policy and they won’t have to pay. Frankly, the overwhelming majority of people outlive their term policies and that’s why they cost a fraction of what a permanent policy costs. Here are some common reasons people choose to purchase term life insurance:
- Mortgage Protection
- College Funding
- Income Protection
- Other Needs
If you’re like most people, your home may be the largest purchase you’ve ever made. Having hundreds of thousands of dollars of mortgage debt, which you can only afford because you’re a two income household, is one of the most common reasons people purchase life insurance. You can match the term period on a term life insurance policy to the length of your mortgage. For example, if you have a 30 year mortgage, you can purchase a 30 year term policy. Some people would even choose a 20 year term policy because they feel that their mortgage balance would be paid down enough after 20 years that it wouldn’t be as concerning to them. The good news is that you have options for both the length and amount of coverage.
Many young parents are concerned with future education expenses for their children. You might be saving a little bit out of each paycheck so you’ll have a good amount saved up when your children need to pay for college. This is a great plan but what happens if you prematurely pass away and can’t save? A term life insurance policy is a great option to make sure there is enough money available for future educational expenses if something happens to you. You can choose a length of term that aligns with your children’s college timeline.
If your family has financial obligations which rely on your income, term life insurance is a good way to make sure that income doesn’t stop when you pass away. Choosing a length of term that will last until your expected retirement is a great way to give peace of mind that your family would be financially okay if something happened to you. Life insurance can’t bring you back but it can alleviate a lot of the stress that comes with financial uncertainty.
There are many other reasons people choose term life insurance, such as to cover credit card debt, student loans, and other needs which have a future end date. Another reason is if you’re unable to afford a permanent policy currently. Term insurance is a great way to get coverage now and lock in your current health rating and you can convert it to permanent coverage, without any health questions, down the road when your budget allows.
Permanent Life Insurance
There are a variety of types of permanent life insurance but the main idea is that they provide coverage designed to last until your death, whether that’s tomorrow or when you’re 120 years old. Most permanent policies accumulate a cash value and the common types are Whole Life and Universal Life.
Most permanent policies accumulate a cash value (sometimes referred to as policy value) which gives the policy owner equity in the policy. This is a major distinction from term insurance where there is no value within the policy. A permanent life insurance policy gives the policy owner a number of options. Depending on the type of policy, you may have the option to stop paying premiums early, take a loan from the cash value or get paid the cash value if you cancel the policy.
Whole life is a popular type of permanent insurance. Whole life typically guarantees the death benefit, premiums, and cash value. Because of the guarantees, this is typically the most expensive type of life insurance but it’s also usually the safest type.
Universal life is another popular type of permanent insurance. It is much more flexible than whole life because it allows you to be flexible with your premium and death benefit amounts. Some types of universal life will guarantee the death benefit and others don’t. Universal life is more complicated to explain and understand than most other types of life insurance so its important that we have a separate conversation to discuss how universal life could fit into your overall plan.
A lot of people start thinking about life insurance after something happens to them medically. Depending on what it is, this medical condition could make them ineligible to buy a traditional life insurance policy. In these situations, there are policies that can be purchased with no medical underwriting. Guaranteed life policies typically guarantee coverage without the need for medical underwriting. There is usually a waiting period before coverage begins also.
Just like you can choose if you want to do business with an insurance company, an insurance company can choose if they want to do business with you too. Underwriting is the process of the insurance company deciding if, and at what price, they want to offer you coverage. During the underwriting process, an insurance company may ask for a variety of information including medical records from your doctor, blood/urine tests, motor vehicle reports and other pieces of information that will help them determine how risky you might be to insure. The riskier you are, meaning the more likely they think you are to prematurely die, the more expensive the policy will be. In some circumstances, an insurance company may decide that they do not want to offer you coverage at any price because they perceive the risk to be too high.
Choosing the Best Option
So, with all of that said, how do you choose the best option for your specific situation? Honestly, it’s very difficult for someone to figure it out all on their own because it would be almost impossible for them to compile all of the options and pricing for each because there is a good chance that the insurance company that has the best option for a 10 year term policy might not have the best option for a 20 year term policy or a whole life policy, etc. You really need to work with a licensed insurance agent so that they can show you the options that make the most sense from various insurance companies. An agent, like one from The Lofrumento Agency, has access to a lot of insurance companies and has the experience to know which companies will be the best fit based on your specific situation. It’s a common misconception that it costs more to purchase a life insurance policy using an agent. Insurance agents are paid by the insurance company and not the customer.
When you’re ready to have a conversation about your life insurance needs, please contact our office at 518-877-7447 or by clicking the Request A Quote button below. We’ll spend as much time as needed to learn about your situation and what’s important to you so that we can find the best option for you and your family.
John Lofrumento, CFP®, FSCP®, RICP®
President, The Lofrumento Agency
Clifton Park, NY / Ballston Lake, NY