Back in January, I shared some insight about six common stages of life where you should review your life insurance policy. Today I want to provide some insight about how you can know what the right life insurance plan is for you.
According to Doug Bambeck, AIF®, principal and financial advisor, Investment Partners, “One of the common mistakes we see in our industry is that people are purchasing the wrong type of life insurance plan.”
You may have heard about a “really good deal” on a life insurance policy or maybe you just know you need life insurance and decided to get some sort of policy, but didn’t pay attention to the terms and conditions. Whatever your situation may be, it’s important that you consider doing a life insurance policy review. It could be the difference between your family being well-prepared and unprepared in the event of your untimely death.
Different Types of Life Insurance Policies
There are two primary forms of life insurance: term and cash value. Each form has different conditions, and cash value life insurance consists of four common types of plans. So as you can imagine, you’ve got quite a few choices. Not every plan will best suit you. So let’s take a brief look at the different forms of insurance.
- Term life insurance: This form of life insurance is exactly like it sounds, “term,” for a period of time. You can purchase a policy for anywhere between 1-30 years, and the policy serves as temporary financial protection for your family if anything were to happen to you during the period of time you hold the insurance. If you live past when the term expires, the policy will more than likely terminate; however, there are some policies that you may be able to renew. Who might benefit from term life insurance? “This kind of life insurance might best suit a young couple that has just purchased a new home or is getting ready to have a new child,” Bambeck said. “Term insurance would allow them to have a large enough death benefit and help keep the policy premiums low.”
- Cash value (permanent) life insurance:
- Whole life: If you choose this type of policy, you basically make the same fixed premium payment for your entire life. You have insurance protection until you pass away, as long as you continue to pay your set premium. Who might benefit from whole life insurance? “While payments don’t need to be for life, you’ll have the same premium payment due for a period of time,” said Bambeck. “Whole life is a permanent policy that will provide a death benefit for the insured their entire life. These policies are nice if you want to make sure you always have insurance no matter what stage of life you’re in. They tend to be much more expensive than term insurance for the same death benefit. The cash value of a whole life policy participates in the dividends that an insurance company may pay to a policy owner. The interest that it pays is usually better than you can receive from the bank and safer than the stock market.”
- Universal life: This type of policy offers you a bit more flexibility with your payments, and you can pay premiums whenever you choose and in any amount you choose. The catch? You’ve got to be sure that your timing and the amount you’re paying completely covers the cost of your insurance and all policy expenses. Just like the whole life policy, you would have this insurance protection for your entire life. Who might benefit from universal life insurance? “This policy works like whole life, but you’re allowed to adjust the premium payments each year depending on your situation,” Bambeck said. “The adjustable premium is nice, but you need to remember that you will still want to raise cash value and cover the cost of insurance so that the policy doesn’t lap in the future.”
- Variable life: Variable life policies tend to be more expensive than other permanent life policies because it allows you to invest in the stock market through separate accounts. Who might benefit from variable life insurance? “Variable life policies are nice for individuals that don’t want the safety of the interest payment that a traditional universal life policy offers,” Bambeck said. “This policy allows individuals to invest the money into mutual fund subaccounts within the policy to take risk in the stock market.”
- Variable universal life: This kind of policy is a mash-up between the universal and variable life policies. You’ll pay premiums whenever you’re able and in whatever amount you can pay – again, as long as you can meet your policy and insurance expenses. But the cash value of your policy will fluctuate based on the performance of your subaccounts. Who might benefit from variable universal life insurance? “This works like a traditional variable life policy, but you get the added benefit of being allowed to make flexible payments,” said Bambeck.
Life Insurance Review Help
If you’ve got a life insurance policy and aren’t sure you’ve got the best plan that meets your needs, consider having your life insurance policy reviewed. You may find that another plan better suits your needs … and your wallet. Contact Rea & Associates. Our professionals can connect you with qualified financial advisors who can do a thorough review of your life insurance policy to see if you need to make any policy adjustments.
Author: Lee Beall, CPA (Dublin office)