Life is risky. Deciding how to mitigate the risk is what insurance is all about. The motto of one company – “Life, Health & Auto” describes the most common insurance areas to consider but most agree that life insurance is the most crucial.
Before addressing life insurance types and values, one should understand changing coverage needs over time. For younger adults, the coverage needed is not as great because responsibilities are less (e.g. debt, retirement and funeral or “final” costs). The need grows with the responsibilities of the policy holder. The highest need spans the birth of the oldest child until the “empty nest.” Many depend on life insurance benefits to maintain the family at a comfortable level plus help with education costs that the policy holder would have contributed had he/she lived. Following the “empty nest,” the need decreases until once again the primary need is for “final costs.”
Life insurance falls broadly into two categories: Permanent (Whole) or Temporary (Term). “Term” life is a contract to pay a specified death benefit if death occurs during a specified period of time. Generally speaking, term insurance is less expensive and a good strategy when combined with a separate, effective investment plan. However, the obligation of the provider runs only during the term. Changing circumstances can make the policy holder a “poor risk” and make securing life insurance difficult.
Where term life should be coupled with an investment plan, whole life could be thought of AS the investment plan. Insurance premiums pay for the insurance and build cash value over time. As a consequence, whole life premiums tend to be significantly higher. The advantage of a whole life policy is the forced nature of the investment and the fact that as long as the policy holder pays the premiums and does not defraud the provider, coverage cannot be canceled.
Choosing life insurance is as personal as the policy holder. Many people use a multiple of annual income (often 5 to 7 times that income) to arrive at the amount of coverage desired. Others prefer to opt for a minimal benefit purchase combined with a separate investment strategy. From a strictly financial point of view, the latter is the best strategy. However, not everyone is able to discipline themselves and would be better served by a whole life strategy.
There is a wide variety of life insurance policies available. And though many providers claim superiority, they are more alike than otherwise. Choosing one is best done with the help of a knowledgeable, trusted agent. In the final analysis, choosing the life insurance tool you want to use, is more about knowing yourself than it is about knowing your life insurance company.