Choosing the Best Type of Life Insurance for You

Life insurance is one of those things that most of us know we need, but we don’t really know what kind to get, how much we should get, when we should get it, or how long we should keep it. Fortunately, it’s not really that complicated. If you understand the options, many times the solution presents itself.

There are 2 principal types of life insurance:

1. Term life insurance provides a death benefit for a predetermined number of years. The term varies but is usually between 5 and 30 years. The premiums are fixed over the lifetime of the agreement. The premiums are calculated based on a variety of factors, but age and current health have the biggest influence. It all comes down to life expectancy.

* Obviously, a 10-year term policy for a 70-year old will be more expensive than the same policy for a 30-year old, all other things being equal. Similarly, two people of the same age and gender will pay different rates if one is obese and smokes.

* Term life insurance is the least expensive type of life insurance.

2. Whole (permanent) life insurance has a death benefit and combines it with an investment or savings account. But this policy covers you until your death; there is no set expiration date. The premiums are fixed or can vary, depending on the details of the policy.

* The premiums are dependent on your age, gender, health, medical history, and more, similar to a term-policy.

* Whole life isn’t the optimum choice for most folks. While it does accumulate a cash value through the investing/savings aspect, the premiums are several times more expensive that comparable term life insurance coverage. It isn’t the best tool for saving.

* Whole life insurance does allow the policyholder to borrow against the current cash value. But this diminishes the value of the policy until the money is paid back. Most financial experts consider whole life insurance to be a poor choice.

In between term and whole life insurance, there are several different styles, including universal life insurance, last-to-die and first-to-die policies that cover both spouses, and more. However, if you understand the concepts of term and whole life insurance, it will be easy to understand any other type of life insurance your insurance professional might recommend.

Consider your life circumstances:

1. Single and no dependents. Most people in this category do not need life insurance. One of the few exceptions might be if you’re parents are not financially well off; you might want to get a small policy to pay for your funeral / burial costs.

2. Recently married. Consider how your spouse would fare without you. If you don’t have children, you probably don’t need life insurance, yet. However, if your spouse is not well employed and likely to struggle long-term without your salary, it is worth considering.

3. Expecting a baby. Now is the time most responsible future parents will purchase life insurance if they are able to do so. Consider how much coverage it will take to cover your take home pay until your children are at least 18. You might want to consider the cost of college as well.

* Remember that life insurance payouts are not normally taxed. You don’t necessarily need to cover your entire salary, just the take home portion. This will allow your family to maintain the same standard of living. If you already have life insurance, you should revisit your amount of coverage anytime a new child is on the way.

4. Retired. Your term insurance has probably run out by now. Ideally, you would also have a healthy nest egg, your house paid off, and all your kids out of your hair, reducing your need for life insurance. Life insurance premiums at retirement age get very expensive, too.

* If you do decide to get permanent insurance, now might be the time to cancel it and get the cash value out of the policy. You probably don’t need the policy any longer anyway.

For financial security, you’ll most likely need some life insurance at some point in your life; however, very few people need it throughout their adulthood.

The easiest way to determine if you need it is to consider the financial impact your family would have endure if you were gone. You want to be able to eliminate that impact to the best of your ability.

Choosing Investments Within Your Variable Universal Life Insurance Policy

A variable universal life insurance policy, known in the insurance industry as a “VUL,” has many benefits. A VUL offers permanent life insurance and allows you the option to invest your cash value funds as you see fit within the policy.

Apportionment of Your Money When You Purchase a VUL

Unlike a term life insurance policy, a VUL builds cash value. This cash value accrues because a part of your insurance premium is applied to pay for the life insurance portion of the policy while the rest of your premium is placed in a separate account where it can earn more dollars for you.

Restrictions on managing the cash account for your variable life insurance policy are many as the Security Exchange Commission, the SEC, oversees such accounts due to their volatile nature. At the time you purchase your policy, you’re required to designate into which type of investment accounts your money will go.

How Cash Value Accounts Function in a VUL

For all practical purposes, your cash value account functions as a mutual fund. In many VULs, the buyer has 10 to 20 choices to invest their cash value dollars. With so many choices, how do you choose which one is right for you?

Review these points when choosing VUL investment options:
1. Consider your overall financial goals. Just as with any investment, you can align your VUL investment choices with your financial goals, choosing conservative or aggressive investments, or somewhere in between, depending on your level of risk tolerance.

* For example, if you want aggressive growth and know the financial market, you’ll be more likely to select aggressive growth vehicles offered within your VUL.

* On the other hand, if you’re more conservative in your investment goals, you might stick with more “fixed” type of investments offered within your VUL, like a money market fund.

2. Recognize the limits of your VUL. The company sponsoring the policy limits choices for investments in VULs. Shop around before you purchase your VUL to find options that you’re most comfortable with.

* For example, Insurance Company ‘A’ might offers 3 choices for your VUL investments (such as stocks, bonds and money market), whereas Company ‘B’ offers 15 choices (a variety of equities, plus real estate bonds, high-yield corporate bonds and various other investment vehicles).

3. Think about diversification. Another important element related to investment choices for your VUL policy is diversification. Do you feel more secure with many smaller investments?

* Keep in mind that the larger the number of investment vehicles you select, the more you’ll probably pay because you’ll be charged a separate fee for each of these vehicles.

* Some financial experts believe it’s smarter to designate just 2 or 3 investment vehicles to limit the amount of your money that goes to pay investors’ fees for your VUL policy.

4. Take overall investors’ fees into account. Bear in mind that the premiums for VULs are double or even triple the amount you would pay for a term life insurance policy, largely due to the costs of accumulating and managing the funds found in the separate cash value accounts.

* Ensure you understand how and when such fees will be charged, as well as the amounts of fees before you buy a VUL.

5. One option, if available, is to the let experts manage VUL cash funds. In the event you’re unsure about your capacity to make investment decisions, ask your VUL agent if you have the option to have the company’s management professionals manage the cash funds for you. This move, of course, would be most wisely done before purchasing a VUL.

You have options when it comes to selecting how to invest your cash value monies in your VUL. Ensure you understand the ins and outs of your VUL before purchase. As with any investment, remember you can incur financial gains or losses over the short or long term based on decisions regarding your VUL.

Cutting Costs for Life Insurance

Life insurance is mandatory for your family’s financial security. However, in today’s financial climate, it’s smart to reduce budget expenditures whenever you can. If you want to reduce the amount of money you spend on life insurance, consider the following points.

1. Avoid purchasing a guarantee issue life insurance policy. Guaranteed issue life insurance policies tend to be quite pricey and with good reason. Companies who sell such policies guarantee that they will issue anyone a life insurance policy, including people who suffer from physical conditions that would not typically be accepted by life insurance companies.

* So, if you’re in good health, it’s less expensive to find a regular life insurance policy.

* However, a guarantee issue life insurance policy might be the wisest choice for you if you’re not in good health.

2. If you smoke, quit. Underwriters raise the price of insurance by 25%-50% for tobacco users.

* When you quit smoking and have gone 12 months without using tobacco, you can request that the insurance company remove the extra rating. Doing so will reduce your premiums.

3. Shop around. Each company underwrites health concerns differently. For example, well-controlled high blood pressure might not even warrant an extra charge with some companies, while other companies will rate up the policy.

* When comparing rates, ensure you provide the same health information to each company so the estimates will reflect your true health condition and can be more easily compared in terms of price.

4. Strive for your ideal weight. When shopping for insurance, it can save you money if you’re at an average weight for your age and sex.

* Each insurance company will rate additional weight differently. After a certain amount of weight, extra pounds will raise the cost of your insurance.

* If you’re overweight, ask your agent to show you the rating chart. If you’re close to a border weight between categories, you may be able to reduce your price by losing only a couple of pounds before you’re weighed by the company representative.

5. Cost isn’t everything. Lower priced policies can actually become more expensive. Companies with an A.M. Best rating of A+ or better may charge more, but those extra costs pay off over the long haul. Here’s why:

* If you go with an insurance company because it charges less and it goes out of business, then you have no insurance at all. So, even though you’ve been paying for insurance, you could actually lose your coverage and all the money you paid if you seek coverage from a risky company.

* In the event that a significant amount of time has passed since you’ve purchased a policy from a company that goes out of business, your health may have changed enough to make getting another policy difficult.

* So, the lesson here is to check out your life insurance company’s ratings in advance of purchasing your policy as one way of ultimately conserving your funds.

These are some of the most common strategies that can reduce your costs when you purchase life insurance. If you practice good health habits, shop around, and do business with a reputable life insurance company, you can secure a life insurance policy that both saves you money and provides for your family’s needs in the future.