Life insurance is not an easy decision. When is the last time you thought about your policy? Do you have the right kind? The right amount of coverage? Is the coverage at work adequate? For some the issue is even: Do they need it at all? These are all important questions and the insurance companies have made them even harder to answer. With an assortment of products bearing confusing names like whole life, term life, universal life, variable life and second-to die-life insurance, the public is often frustrated into inaction. Some of these policies build up cash value with each premium paid, some invest that cash value in the stock market, while others pay a fixed rate of interest. Some have zero cash value; and a few combine all these ideas.
NASDAQ's recent article, "Why Have Life Insurance?," says it's no wonder so many Americans don't have life insurance. It cites a recent study by life insurance advocacy group LIMRA which revealed that most Americans thought a 20-year $250,000 level term life policy for a healthy 30-year-old would cost at least $400 a year. However, annual premiums for this type of policy generally are closer to $150. LIMRA also noted that 83% of consumers don't buy life insurance, and inaccurate information like this could be part of that decision. In addition, there are people who are paying for insurance that isn't a good fit for them, paying too much for their insurance, or just have too little coverage to protect their family.
That's why it's important for you to sit down annually with an insurance professional to review your policy and also to speak with your estate planning attorney about the role life insurance may play in your overall estate planning strategy. Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family as you age and your family situation changes.
Basic Types of Life Insurance
Finding the right policy may be easier than you think. There are really just two basic types of life insurance: term and cash value. Cash value, or "permanent," life insurance policies offer death benefits and some investment qualities, as some of the money you spend on the policy goes into a savings program. Cash value policies have higher premiums than term policies because term life offers only death benefits during the policy term. Term can be a good option for young adults because it's pretty inexpensive.
Term life has its drawbacks. If you outlive the term of the policy, you or your family get nothing back. Term life policies can be renewed, and some can be converted to permanent coverage.
The big question is how long do you plan to keep the policy? If you'd rather not have to pay premiums for decades, term life may be more attractive, especially if you're just looking for a short-term hedge against the unforeseen. If you are looking at estate planning, permanent life insurance may be a better choice.
Talk with your estate planning attorney before you start spending money on a policy. He or she can help you compare term vs. permanent insurance options to help you create a strategy to make sure that your coverage adjusts over time as your family needs change.
Reference: NASDAQ (October 9, 2015) "Why Have Life Insurance?"