Choosing Your Life Insurance
Most people have life insurance for financial protection until the kids are grown, the house is paid off and they’ve got enough savings to protect their surviving spouse. Many people get a life insurance policy through work, but what if you are a freelancer or if your workplace does not provide coverage? Then you may want to buy a policy on your own.
If you do, you are immediately faced with a set of choices. First, where should you buy the insurance policy? You can contact a local agent, explore online marketplaces or reach out directly to insurance companies. A local insurance agent, who may represent one company or multiple companies, can provide personalized advice based on your specific needs and financial situation. Online marketplaces allow you to compare life insurance policies from multiple companies; these platforms often provide tools to calculate coverage needs, making it easier to compare rates and benefits side by side. Reaching out directly to insurance companies sometimes leads to lower costs (by eliminating middlemen like agents); additionally, an insurer might provide special offers or discounts. In other words, each option has its benefits for convenience, guidance and price comparison.
Next you will have to decide what kind of life insurance policy you would like. An individual term policy has level premiums — meaning that you pay the same amount every month and the death benefit is guaranteed as long as your premiums are paid. However, when the term expires, you lose coverage. While you could then buy another policy, it will likely come at a higher cost because you are older and may have had changes to your health.
Alternatively, if you act before the policy expires, you might be able to convert the term policy to permanent life insurance. This option allows you to continue coverage without going through a new medical exam, but it typically comes at a higher cost. Permanent insurance lasts for your entire life as long as premiums are paid.
Permanent insurance policies come with a cash value component, which is essentially a savings or investment account built into the policy that accumulates value over time.
Benefits of the cash value component
When you pay the premium on a permanent life insurance policy, a portion goes toward the insurance coverage (the death benefit) and a portion goes into the cash value account. The cash value grows over time, either at a fixed interest rate (for whole life policies) or based on market performance (for universal or variable life policies). The growth is tax deferred, meaning you don’t pay taxes on it as it accumulates. Typically, the cash value doesn’t go to your beneficiaries when you die. Instead, the insurance company pays out the death benefit, and any remaining cash value reverts to the insurer.
However, the cash value may be seen as a benefit you can use while you’re still alive. Many policies allow you to:
- Borrow money against the policy; you will have to pay interest, but the rates are usually favorable, and any unrepaid amount will be deducted from the death benefit
- Withdraw some of the cash value (though this will reduce the death benefit)
- Surrender (cancel) the policy; this might be necessary if you need the cash value (minus any fees or penalties) to live on during retirement
The cash value component is a key reason why permanent life insurance policies are more expensive than term policies.
Additional considerations
Unlike market-based investments, permanent life insurance protects you from market volatility because the insurance company assumes the investment risk. On the other hand, investments such as stocks or mutual funds often perform better over the long term than the cash value growth of a policy or the potential dividends that the policy may pay.
Life insurance policies are often sold by agents who earn a commission on the sale, which adds to the overall cost. However, agents can provide value by conducting a detailed analysis of your financial needs and recommending a policy tailored to your situation. You can save that commission cost by purchasing life insurance online.
If you own a policy, you can transfer ownership — one of the most common reasons for transfer is to keep the policy out of your taxable estate. You may transfer to a person, business or trust, but the transfer must happen three years before your death to keep the policy out of your estate. Once you have made the transfer, you can no longer change the policy, and the new owner must keep up any payments due.
Making the right decisions
Permanent life insurance isn’t necessary for everyone. Some individuals might not benefit from the lifelong coverage or cash value feature, particularly if their main concern is temporary coverage for a specific period, like raising children or paying off a mortgage. That’s why a variety of life insurance options are available — people have different financial goals and needs.
You should carefully consider choices, read your insurance contract and consult with financial professionals.
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