By Walid Petiri
Buying 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?
Do you even need it at all?
These are all important questions, and 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. Some pay a fixed rate of interest. Some have zero cash value. A few combine all these ideas.
No wonder so many Americans lack life insurance. A recent study by life insurance advocacy group LIMRA discovered that most Americans thought a 20-year $250,000 level term life policy for a healthy 30-year-old costs about $400 a year.
In reality, annual premiums for such a policy typically run about $150. LIMRA noted that 83 percent of consumers forego buying life insurance. I see this misperception all the time. In addition, lots of people are paying for insurance that is not right for them, paying too much for their insurance or flat out have insufficient coverage for their family.
Just to clarify, a 20-year term policy for $250,000 is a 20-year agreement between you and the insurance company that it will pay $250,000 to your beneficiary upon your death at any time between day 1 and the last day of year 20 (as long as you pay the premiums). Oh, and a term policy does not build any cash value.
This is why it is important for you to sit down annually with an insurance professional to review how your policy works and how it will help you protect your family.
When you’re young, you need a certain type of policy. As you raise a family and take on more responsibilities, your needs change again. At some point when the nest is empty or other life changes occur, you don’t need life insurance at all, or you may desperately need it to protect your estate.
Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family now, today, not when you bought it.
Young adults don’t buy life insurance. In a 2014 report covering attitudes about life insurance, LIMRA found that only one-third of Gen Y Americans have any life insurance coverage. In the same survey of 6,000 respondents, 6 in 10 Gen X and Gen Y Americans said their households would be hard pressed to make ends meet if their primary income earner passed away.
This is important, as the primary reason for life insurance is income replacement for the family.
Shopping for coverage may seem confusing, boring or unnecessary. Yet when you have kids, get married, buy a house or live a lifestyle that significant salaries power, the need arises.
While the confusion on product abounds, insurers are trying to make purchasing insurance easier these days. By making more choices accessible online and shortening the length of time it takes to approve and issue a new policy.
Finding the right policy may be simpler than you think. There are two basic types of life insurance: term and cash value. Cash value, or “permanent,” life insurance policies offer death benefits and some of the characteristics of an investment, a percentage of the money you spend to fund the policy goes into a savings program. Cash value policies have correspondingly higher premiums than term policies, which offer only death benefits during the policy term. Term is a great choice for many young adults because it is relatively inexpensive.
Term life has an economic downside, though: If you outlive the term of the policy, you or your loved ones get nothing back.
Term life policies can be renewed (though many are not) and some can be converted to permanent coverage.
The key question is: How long do you plan to keep the policy? If you would rather not have to pay premiums for decades, then term life stands out as the most attractive option; especially if you are just looking for a short-term hedge against calamity. If you are looking further ahead or starting to think about estate planning, then permanent life insurance may prove a better choice.
Consult and weigh your options. Talk with a financial or insurance professional you trust before spending money for a policy.
That professional can perform a term-versus-permanent analysis for you and help you weigh the variables. Additionally, together you can map out a strategy to make sure that your coverage adjusts over time as your family needs change.
ABOUT THE WRITER
Walid L. Petiri is chief strategist at Financial Management Strategies LLC in Baltimore.