What to Consider Before Buying Life Insurance

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Determining whether to purchase life insurance is a big decision. There are numerous policies that provide different types of coverage. Some are for a specific period of time, and others are for life. In light of National Insurance Awareness Day, which is June 28, now is the perfect time to assess whether purchasing life insurance is right for you.

Just like any other insurance plan, life insurance requires you to pay premiums in exchange for coverage. These premiums can be paid through a series of payments or all at once, depending on what works best for your budget. However, you’re not required to purchase a life insurance policy, so it’s important to determine whether you can afford it before moving forward.

In addition to the financial aspect, there are other factors to consider. If your death and the loss of your income would cause financial hardship for your beneficiaries, a life insurance policy may be a good choice. Life insurance can also cover your end-of-life care, funeral expenses and any outstanding debt in the event of a premature death. If any of these apply to you, life insurance might be a feasible solution.

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The different types of life insurance

Before purchasing a life insurance policy, it’s important to know the different types that are available. Some are temporary and some are permanent.

Term life insurance is an example of a temporary policy. These policies typically provide coverage for 10, 20 or 30 years. There are also different subcategories for term life insurance.

Decreasing term life insurance is a renewable type of insurance with coverage that decreases as the end of the term nears. These policies also have a predetermined rate.

With convertible term life insurance, policyholders can convert the term policy into a permanent one.

Renewable term life insurance gives policyholders a quote for the year the insurance was purchased. From there, the policy’s premiums increase annually.

If you’re interested in receiving lifetime coverage, a permanent policy might be more suitable. Permanent life insurance is usually more expensive than term, but the coverage will last until you die or stop paying the premiums. Similar to term life insurance, there are different types of permanent coverage.

One common type is whole life insurance. In addition to providing life-long coverage, this policy also offers a cash value component, which is like a savings account. The cash value component allows the policyholder to take out loans or pay premiums.

Universal life insurance also provides a cash value component, but unlike whole life insurance, the cash value component earns interest. Another perk is that the premiums are flexible, and the policy provides options for level death benefit or increasing death benefit. A level death benefit is a payout from the policy that remains the same regardless of when the policyholder dies. An increasing death benefit is a little different. This type of benefit allows the policyholder to increase the payout amount over time, but the premiums are more expensive.

Another type of permanent life insurance is an indexed universal policy. This type of insurance allows the policyholder to earn a fixed or equity-indexed rate of return on the cash value.

The last option is a variable universal life insurance, which gives the policyholder the option to invest the cash value into a separate account. This policy also includes flexible premiums, and policyholders can choose between a level or increasing death benefit.

How life insurance premiums are determined

In addition to understanding the different types of policies, it’s important to understand the premiums, which are based on a number of different factors. For example, your health and age are huge factors that determine the cost. Therefore, maintaining your health as best you can and purchasing life insurance as soon as you need it may help lower the cost. But how do you know if you actually need it?

As briefly mentioned earlier, life insurance is about providing your dependents with financial support after you're gone. Parents with minor children or children who have special needs could benefit greatly from life insurance. If one parent dies, these policies can help supplement the surviving spouse’s income. If you have a child who requires life-long care, life insurance can help cover that cost once you and your spouse have passed away.

However, parents aren’t the only ones who can benefit from life insurance. These policies can also be useful for adults who jointly own property, families who can’t afford funeral expenses, married pensioners and those who have pre-existing medical conditions.

Purchasing life insurance can be a great way to make sure your beneficiaries have financial support once you pass away, but it comes at a cost. If you’re considering buying life insurance, determine just how much you’ll need and do your research. Meeting with a financial adviser can help determine what kind of policy works best for you and your situation. The last thing you want to do is purchase a policy you can’t afford or one that doesn’t provide the coverage you need.

Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Patrick M. Simasko is an elder law attorney and financial adviser at Simasko Law and Simasko Financial, specializing in elder law and wealth preservation. He’s also an Elder Law Professor at Michigan State University School of Law. His self-effacing character, style and ability have garnered him prominence and recognition throughout the metro Detroit area as well as the entire state.