Once you have decided to purchase life insurance, you need to think about what kind of insurance to buy and how the coverage should be designed to best meet your needs. Everybody has a different financial situation, and here are some essential issues to consider:
How long do you need the coverage to last?
If you have a defined period of time during which you want to have coverage, then either term or permanent life insurance could be appropriate. Term policies can be purchased with guaranteed level premiums for 10, 15, 20 or 30 years. But once the guarantee period ends, the premium can become very expensive. If you anticipate needing coverage for more than 30 years or for your entire life, then you should consider permanent insurance.
For many people, the need for coverage decreases over time, for example as debts are paid off and children graduate college. One strategy is buying a combination of policies.
Do you want a guaranteed policy?
Only term, no lapse universal life and some whole life policies have guaranteed premiums and death benefits. In most other permanent policies, the premium is based on a number of assumptions that include an assumed rate of return. That means you as the policy owner are accepting investment risk, and if the policy underperforms, you could be forced to pay a higher premium. So it is important to understand where you want to have risk and where you want guarantees in your financial life.
Should you buy a policy that builds cash value?
Most people buy life insurance for the leverage. They want to pay a small premium to get a large death benefit. Unless you have a specific need for permanent coverage, such as estate planning or funding a special needs trust, it makes sense to first buy a term policy with a conversion rider and fully fund all your qualified retirement plan and IRA options. Then, if you have the cash flow and are ready to commit the funds for a long period of time, it could make sense to buy a permanent life insurance policy.
The Bottom Line
Your life insurance coverage should be tailored to meet your individual financial situation. And you should not be reluctant to ask the insurance broker a lot of questions about different policies and design options.