How to Choose a Life Insurance Policy

Choosing a life insurance policy can be overwhelming because it forces us to think about something we really don’t want to happen: the effects on our family or loved ones once we die. Then, there are all the options and the added cost.

Why Should I Get Life Insurance?

The main reason to get life insurance is to secure a lifestyle or wealth for your family (or a chosen beneficiary) after you die. There are other advantages as well. A few common reasons to get life insurance include:

1)Paying for funeral expenses, unpaid medical bills, student debt, or other debts remaining after death so that your family does not need to assume the burden
2)Leaving money behind to your family or spouse so that they can maintain the lifestyle they were accustomed to
3)Leaving an inheritance, donating funds to a charitable cause, providing funds for college, or paying off a mortgage
4)Building wealth, as can be seen when using life insurance with investment options
5)Transferring wealth and taking advantage of various tax breaks for the beneficiary when receiving the death benefit—life insurance can provide many tax-free advantages
6)Paying for estate taxes so your family does not have to use the inheritance to cover these taxes
7)Securing a mortgage or other debt when the lender requires it

Types of Life Insurance Policies

There are two main categories of life insurance: term life insurance and permanent life insurance.
In the term life insurance category, you may choose life insurance for a specified length of time, which is known as the term. With permanent life insurance, the length of the policy is for life (some companies may also offer the plans to age 65).
While you really only have one option for term life insurance, there are two types of permanent life insurance:

  • Term life insurance: Purchased for a specific length of time, usually between 10 and 30 year terms, with no cash values, and expires at the end of term, unless it is “convertible.” This is the least expensive life insurance option.
  • Whole life insurance: Has a set premium and is valid as long as you keep paying the premiums. This is a type of permanent life insurance. It may build up cash value and if you surrender the policy, it may be returned to you.
  • Universal life insurance: Also a type of permanent life insurance, this kind offers investment options. Premiums may be adjusted over time based on how you decide to manage it. Factors include your investments, cash values, and other options such as borrowing from your life insurance policy.

How Much Life Insurance Do I Need?

Since people will buy life insurance for various reasons, how much you need will depend on why you are buying it. If you are looking to secure the financial well-being of your family should you die unexpectedly, then you will need to review various personal factors to help you figure out how much you need.
For example, how much income would your family need per year to replace your lost income? Keep in mind that when you are alive, part of your income goes to sustaining your own needs and activities, so if your income was $75,000, but you used a portion for your own consumption, you may want to consider that. Also, if you cover your mortgage in the death benefit, would a portion of your income have gone to that? These factors can reduce the amount of income you need to replace.
The answer to income replacement is not always straightforward, so consider these questions and more carefully:

  • How many years would you need to provide income?
  • If you have a spouse, would they work after your death? How much income do they make to contribute to family expenses? How long will they work?
  • Do you need to provide funds to be used for education, like college?
  • How much debt does the family (or you) have? Do you want to cover this in your life insurance? Are there outstanding loans, medical bills, or mortgages?
  • What would your family’s expenses be as a result of your death? Consider funeral expenses, costs of hired help at home, and more.
  • What investments and savings do you have?