A recent study shows that most Americans do not have enough life insurance coverage.
In fact, though 85% of people agree that most people need life insurance, only 62% say they have it. And of those 40% feel that they don’t have enough coverage.
Why is that?
Could it be that the variety of insurance policies makes it confusing for people to know what type of insurance to get, or is cost a factor? In this article we’re going to look at the type of policies available and make the connection between policy type and overall premium cost.
Types of insurance policies
Broadly speaking there are two main types of insurance policies:
- the kind you get through work (group life),
- and the type of insurance you buy for yourself to cover you and possibly your family members (personal life).
If your employer offers life insurance this is typically for an amount of coverage based on your annual salary, like 1x, or 2x your salary. Dollar for dollar it is relatively inexpensive to purchase. The downside is that should you change jobs you will lose this coverage and need to either purchase a policy on your own, or get a new one through your next employer.
When it comes to getting a personal life insurance policy there are two main types to consider:
Term insurance, as the name implies, provides you with a set amount of coverage where you insurance premium payments are set at a fixed rate for a number of years.
The good news for families with young children is that you can usually purchase a large amount of insurance for a relatively low price. Say, for example, that you choose a million dollar policy for 20 years. Depending on your age and health status you can usually purchase this amount of coverage allowing you to provide financial protection for your family without breaking the bank.
The downside to this approach, however, is that once your term is up the premium payments will become very steep.
So, though term policies are very useful to provide income protection when you have young children, they do not provide you with adequate protection for other issues as you get older, like estate planning or wealth transfer.
That’s where permanent insurance comes into play.
There are, generally speaking, three types of permanent polices:
- whole life
- universal life
- variable life
All three of these policies will typically have stable premium amounts throughout the lifetime of the policy.
And all three will build a cash value that you can borrow against (if needed), though the way each policy builds your cash value varies for each one. Both variable and universal policies are tied in one way or another to how well the stock market performs (either an index or individual sub-accounts like mutual funds), where whole life policies act more like a savings account offering your a set interest rate for growth.
So which type is the right one for your situation?
To answer that question adequately depends on a number of factors, such as:
- your financial situation
- your budget
- the reason for getting the policy
- your long-term financial goals
If estate planning and wealth transfer are important to you then a permanent policy makes the most sense.
If you have young children and need a larger dollar amount of insurance coverage to protect against lost income should something happen to you or your spouse, then term is the most economical policy option after signing up for group life insurance through your employer.
At the end the day getting life insurance, and ultimately knowing what it will cost, depends on your age and your health. Getting a policy when you are younger, and typically healthier, means you can get more coverage for the same or lower price.
For this reason alone it makes sense to speak with an experienced life insurance agents (like the folks at Bruen Deldin DiDio) who can best advise you regarding policy options and possible cost.
Because it’s not just about getting a life insurance policy… it’s about getting the right policy for your financial situation.
Does that make sense to you?
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Either way the choice is yours…