Important Considerations for Evaluating Life Insurance Options

Do you ever worry about how your family would cope if you were gone? If you’re under 40, you probably don’t think about it much. Few of us did in our younger days.

You might have thought about term or whole life insurance, but when you’re young, “later” always seems like the best policy. After all, nothing’s going to happen to you now because you’re young and immortal. Ah, the beautiful, blissful ignorance of youth.

The Questions to Ask

Now that you’ve made peace with your own mortality, it’s time to start researching life insurance policies. Succinctly, the three questions are “What?,” When?,” and “How much?” As far as the “what” is concerned, there are four kinds of life insurance policies available:

  • Whole life insurance
  • Variable life insurance
  • Universal life insurance
  • Term insurance

What Kind Do You Choose?

Whole life insurance is the most expensive of the four, largely because it never “runs out.” The good news is that your premium can never increase, so there are no unpleasant surprises down the road. You can also invest any cash value that you have accumulated as part of your premium payments.

Variable life insurance is similar to whole life insurance, but its rates are (as the name implies) variable. The variance relates to the amount of cash value you want to build in the policy. There are usually many options from which you can choose based on how much you want to save, how much you want to pay per month, and whether you want the accumulated cash to be added to your death benefit, treated as a direct investment, or taken out as cash income.

Universal life insurance offers the buyer the best of both worlds. The cash accumulation can be set at a constant or variable rate. Companies may control the number of times you can change back and forth based on your premium and the type of universal coverage you select.

Term insurance has no cash value and stops after a set number of years. The company you work for might provide you access to a certain kind of term policy as part of their group life insurance coverage. The term usually lasts until you quit or get termed. In essence, the policy starts when you become “dead to the company.”

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When Should You Get Life Insurance?

How old should you be to buy life insurance? If you’re married and have children, the answer is now. Even if you just turned 20 and are still waiting for your high school acne to clear up (don’t worry, it will disappear any day now), you’re just as susceptible to accidents, disease, and other misfortunes as someone three times your age. You’re going to want to provide for your family just in case.

If you’re single and have no dependents, you might not need life insurance just yet, but it never hurts to plan ahead.

But which kind of policy should you get? The general rule of thumb is to buy term insurance when you’re young and whole life insurance when you’re older. Unfortunately, there’s no one-size-fits-all insurance policy.

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Many things will affect your decision, such as your financial situation, your investment portfolio, your medical history, your driving record, and the needs of your family members.

How Much?

While term insurance can be inexpensive, whole life insurance can be a substantial investment. The other kinds of insurance fall somewhere in the middle. As a hypothetical example, a 30-year-old, non-smoking male in good physical shape might be able to find a substantial term insurance policy for about $30-$50 monthly. Someone buying whole life insurance might expect to pay about 10 times that much.

Young people love the low price of term insurance policies, and savvy buyers usually purchase a term length that coincides with the departure of the children from the household. At that point, they may decide on any of the other policy types. Whole life insurance becomes much more attractive because people at that age have often paid off their mortgage expenses.

Now that you understand which questions to consider, you can start comparing your options for life insurance and find the policy that works for you.

Do you ever worry about how your family would cope if you were gone?  Most people, especially when they’re younger, don’t like to think about it.  Knowing your options, however, and planning ahead—at any age—is always in your best interest.  The answers to these three key questions of “what,” “when,” and “how much” will help you compare your options for life insurance and find the policy that works for you.

1. What Kind of Policy Should You Choose?

Unfortunately, there’s no one-size-fits-all insurance policy.  Different policies may make more sense depending on your age, financial situation, and what’s going on in your life.  A general rule of thumb—based on age—is to buy term life insurance when you’re young and whole life insurance when you’re older.  Nevertheless, before you buy a policy, you should consider all your options and understand the three basic kinds of life insurance:

  • Term Life Insurance
  • Whole Life Insurance
  • Universal Life Insurance

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2. When Should You Get Life Insurance?

How old should you be when you buy life insurance?  While there is no right or wrong answer, there are four main considerations you should take into account:

  • Are you buying early?
  • Does anyone depend on you?
  • Has your work changed?
  • Have you had any major life events?

Are You Buying Early?

In general, the younger you are, the less life insurance will cost.  For this reason alone, it’s best to consider your options early, even if you’re single and have no dependents.  Health issues may arise later in life that can make life insurance more difficult or costly to obtain. And even if you just turned 20, you’re just as susceptible to accidents, disease, and other misfortunes as someone three times your age.

Does Anyone Depend on You?

Regardless of your age, you can benefit by purchasing life insurance if anyone depends on your income.  Life insurance can act as an income replacement and make up for what your family may lose in the event of an unexpected death. 

Has Your Work Changed?

If your work has recently changed, it could be the right time to purchase life insurance or reassess a policy you already may have.  A pay raise, for example, may signal a need for insurance coverage to protect that increased income. Likewise, if you already have a policy through your work, it could be beneficial to buy additional coverage if your employer’s plan doesn’t adequately protect your family’s obligations.

Have You Had Any Major Life Events?

Whenever any major events occur in your life, it’s a good time to review your need for life insurance.  If you get married, purchase a new home, or have children—all such milestones will increase your financial obligations and may require extra financial security.  Life insurance, for example, can help cover mortgage payments or your children’s college tuition payments well into the future in the event of your death.
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3. How Much Should You Spend?

How much insurance coverage do you actually need?  And how much should you spend on life insurance per month to get that coverage?

First, to decide how much coverage you need, you can estimate how much your loved ones need to replace your annual income.  The easiest way is to multiply your annual salary, and purchase coverage equal to five to ten times your annual salary. For example, if you earn $50,000 per year, you’d buy an insurance policy of $250,000 to $500,000.

After determining how coverage you need, you can then analyze how much the different types of insurance will cost per month.  In general, term insurance can be inexpensive, while whole life insurance can be a substantial investment per month.  As a hypothetical, a 30-year-old, non-smoking male in good physical shape might be able to find a substantial term insurance policy for about $30-$50 per month.  Someone buying whole life insurance, however, might expect to pay about 10 times that much.
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