If you’ve ever looked at or considered life insurance, you’ve probably quickly become overwhelmed by all the choices. There are so many different types of policies with so many other little options; it can quickly turn from a no-brainer choice to get life insurance, to giving up because you don’t know what to do. And then you compound this with aggressive sales reps who are trying to get a commission, and you could quickly find yourself dropping the issue.
However, life insurance is important, especially if you have a family that depends on your income. As such, it is time that you take some life insurance 101, and spend an afternoon thinking about the policy you need for your family. No one plan is right for every family and every situation, so make sure that you carefully consider your individual financial needs.
Life Insurance Choices
There are many different types of life insurance policies, and most come with a lot of potential extras. When thinking about the choice, you want to consider how much insurance you need, and over what time frame you need coverage. Many individuals with families that depend on them usually pick amounts to cover all necessary expenses for several years, and have the term last until their children graduate college. That way there is plenty of money and time in case something happens.
When it comes to making the decision, here are the main choices you may want to consider:
Term Life: Term life is the simplest type of life insurance, and as such, it is very common. It is also the most traditional insurance product. For term life, you basically choose an amount of insurance (the death benefit) and the period of time (usually 10 to 30 years). Your policy is good for the amount of the term, and your premium typically remains the same over the term as well. There are variations on premium amounts and other things, but a term policy is just like it sounds: it is set for a specific term.
Whole Life: Whole life is usually the most expensive policy type because of the protection it offers: lifetime protection with locked-in premiums. This is sometimes referred to as a permanent life insurance policy. This type of policy also usually has some type of cash value affixed to it with grows tax free and can be borrowed against if needed.
Universal Life: Universal life is very similar to whole life insurance in that it offers a cash value that grows over time. The difference between whole life and universal life is that universal life offers more variations in the way premiums are paid, and the duration of the death benefit.
Variable Universal Life: Variable universal life is the last major variation, which is like a universal life policy, but the cash value portion is actually invested in some type of security, like a stock fund or bond fund. The result is that there is the potential for greater growth of the cash value over time. However, poor stock market performance can also lower the value of the insurance policy, unless you pay extra for some guarantees on principal.
With all of the whole and universal life insurance products, it is important to pay attention to the fee structures of these plans. Many of these policies have fees such as surrender charges so if you change your mind and enough time hasn’t passed yet, you could end up paying quite a bit of money to get out of the policy. That is why it is so important to do your research before making a choice on life insurance.
Other Options
Another option that many people choose is to go with their employer’s group policy. These policies are typically issued in multiples of your annual salary, such a 1x or 5x your annual pay. So, if you make $100,000, and choose 5x, your policy amount would be $500,000.
The important thing to remember about employer group life insurance policies is that they are only in force while you are employed. So if you change jobs or are laid off, you could suddenly find yourself without insurance. That is why many people supplement these plans with traditional life insurance policies.
Occam’s razor — when there are multiple solutions to a problem, choose the simplest (and least expensive) one– applies here.
Good thoughts, Biz. Sometimes we make things too complicated on ourselves for nothing.
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We don’t have life insurance currently. It’s a tough thing to think about!
We have basic coverage currently, but if / once we have kids I’m sure we’ll want to step that up.
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