4 Helpful Questions: How to Choose the Right Life Insurance
When you think about life insurance, many people focus on the death benefit and how much your loved ones may need if you die. While that is the most common reason people buy life insurance, there are many other uses for it. And there are a lot of different types of policies that allow you to achieve different goals: Term insurance. Permanent insurance. Limited pay. Level term. Whole life. Variable life. The choices can be overwhelming.
So how do you make sense of it all to determine which one(s) might be right for you? You can begin to narrow down the possibilities by asking yourself four questions:
- How do you intend to use your life insurance?
- How much life insurance do you need?
- What's your budget today, and how might that change over time?
- What else is competing for your hard-earned dollars?
Let's take a look at them one at a time.
- How do you intend to use your life insurance? In most cases, the death benefit is why you will buy life insurance. It can cover the cost of a mortgage, sending kids to college and protecting your family’s lifestyle should something happen to you. But as you move into your 40s, 50s and 60s, life insurance may take on additional roles in your financial planning. That could include adding to your retirement income and leaving a legacy to loved ones or a charity. So give some thought to what you want life insurance to do for you today—and tomorrow—and then make a list of what you want your policy to provide.
- How much life insurance do you need? Once you know what you want life insurance to accomplish for you, assign a dollar value to each of the expenses you'd want it to cover if you were no longer able to provide for your family or loved ones. There are a number of online calculators that can help with this step, but most do not account for your future needs and changes that happen throughout your life. That’s why it’s helpful to sit down with a financial professional who can get you know you and help you determine what you may need today and in the future.
- What's your budget today, and how might that change over time? With an idea of how much coverage you'll need and how you intend to use your life insurance now and in the future, you can begin to research cost—which can vary greatly depending on the type of insurance you're considering.
There are two main types of life insurance: Term life insurance and permanent life insurance. Term life insurance is often the most affordable type of insurance. It allows you to get the greatest amount of coverage for the lowest initial premium. That's what often makes term life insurance an attractive option for people who are just starting out. However, term life insurance is also temporary; it's designed to provide coverage only for a specific period of time, such as 10 or 20 years.
Permanent life insurance is designed to provide coverage for your entire life. And over time, permanent life insurance policies build equity—or cash value—which you can use at any time and for any reason.
Because of its affordability, many people start by purchasing term life insurance and then, as their income grows, convert some or all of their policy to permanent life insurance to take advantage of its longer-term benefits.
- What else is competing for your hard-earned dollars? The type of life insurance you buy and the amount of coverage you get is also dependent on the other financial commitments you have. The last thing you want to do is buy coverage you can’t afford only to have it lapse soon after you purchase it.
Buying life insurance is a big decision. So while it's great to do research on your own, it’s still important to get advice from a financial professional, too, because the choice you make today will have a lasting impact on yourself and those you love.