Some things to consider when buying or keeping a life insurance policy. First, not everyone needs life insurance, so you need to decide if you are indeed one of the people who do. If anyone relies on you for financial reasons, there is an above average chance that you are one of the ones who does, in fact, need a life insurance policy. But if you are like my parents, retired with only grown children and near no amounts of debt, you would be one of the ones who does not need life insurance. So, now you have determined if you need life insurance here are a few things to consider before you buy or replace a policy.

First, as I stated previously if you are married or have anyone who is a dependent for you, there is a good chance you will need some sort of life insurance. And here I am not just talking about children; a dependent could be an aging parent, a sibling that relies on you or a significant other who you care for. The key here is to make sure if anyone does depend on you for any financial support that you have a policy in place to aid in protecting them in the event of your death.

Then, you need to not only think of life insurance as a replacement for the monetary value of someone’s life. While most life insurance is intended to replace someone’s earnings, there are other needs as well that it may be used for. Some people simply want enough funds to cover their final expenses or debts. If you are younger, you may have multiple policies to cover large expenses such as a mortgage or your children’s education expenses. And when using life insurance for financial planning, it is not only a wage earner that needs to be considered but also a stay at home parent. The reason that you may want to consider a policy on them is someone would have to care for small children if they were to die and that is an added expense that many single parents just cannot absorb easily.
Here you need to understand that a life insurance policy is actually a contract with legal ramifications. It is between a company and normally a person or trust in some instances. Here, life insurance companies pool payments called premiums to cover expected payouts or death benefits. If there is any difference between what is paid to the company and what is paid out, that becomes the company’s profit.

A life insurance policy has four major players in its creation and lifecycle. First, there is the insurer or life insurance company that issues the policy. Then there is the owner or person that pays the premiums on the policy. This could be a company or trust and is not always an individual person. The insured is the person whose life the life insurance company is insuring against their death. And finally, the beneficiary is the person who receives the payment of the death benefit. In some instances, the owner and insured are the same person as many people purchase a life insurance policy on themselves and leave the proceed to their beneficiary.

Life insurance should always be used as a risk management tool and not as an investment. Many life insurance agents try to sell certain policies as an investment to people when in reality these policies are extremely poor when it comes to being an investment. You would be better off buying a level term policy and investing the difference in a low-cost index fund.

So what kinds of life insurance have an investment component? That would be a permanent policy such as whole life, variable life or universal life which all have an investment component that makes up the cash value of the policy. These policies are different from a term policy which is for a certain number of years, say 15, 20 or 30 years. A permanent policy if for the remainder of someone’s life and is not for a set number of years. And here the type of policy will help determine the price. Term policies are generally very inexpensive when compared to permanent policies if purchased at a young age when you are generally healthier. Anytime you wait until you are older the policy will always be higher as the chances of you dying during the policy is greater. And permanent policies always cost multiples of a term policy due to the fact they are more likely to have to be paid when compared to a 30-year term policy purchased by someone who is a healthy 30-year-old.

And when you do buy a policy it does not have to be all that complicated. All you need is to have an idea of what level of death benefit you want and what duration of time you want covered. In the majority of instances, a household would be well served to buy enough of a death benefit to cover the replacement of income for a set number of years. In many instances, it is as simple as replacing ten or 15 years of someone’s income-earning power. Here a rough gage is to have enough of a death benefit to invest the proceeds and earn about 5% on it to replace 75% of the insured’s income. As an example, say you earn $100,000, you would want a policy to pay out $1.5 million to earn $75,000 a year without touching the principal for the 75% replacement goal. When possible try to use a real-life agent and not an automated service the reason here is life insurance can and is complicated, and it is best to have someone walk you through the entire process.

And never cancel a policy if you are replacing it until the new policy is purchased and in effect. The reason here is many times you may have health issues that arise after one policy is purchased that may make you ineligible to buy the newer policy. That is why it is extremely important that you do not cancel an active policy until you have its replacement in place and in good standing. Then and only then is it really safe to cancel the unwanted policy.
While these are not the only things that you may want to consider when buying a life insurance policy, they are a good start. Always try to consult a financial planner or a reputable life insurance agent when considering a life insurance policy.

As always, feel free to contact me directly or feel free to leave a message here.