As it turns out, finding a life insurance policy that’s right for you and your family can be difficult because there isn’t a standard one that will work for everyone. Although choosing the best life insurance policy differs depends heavily on individual circumstances, the information in this article should help you to become, at a minimum, better educated on how to approach the process.
Term and Whole Life Insurance
Term life insurance provides coverage for set period of time often ranging between one to 30 years. Whole life insurance lasts until age 100 or death, whichever comes first, and also comes with a cash value. Cash value builds similarly to home equity and becomes tax-free money which you can use for emergencies.
Michael Smith, an insurance agent for State Farm, says term policies are typically better to start out with because they’re a lot less expensive.
“A lot of people start out with term. As they grow in their career or in their marriage and their needs change and maybe their financial situations change, [they’re] able to purchase more insurance, [and] then they migrate towards the permanent or whole life coverage,” Smith says. “There’s a different policy for every individual—a lot of it depends on what you’re able to afford.”
However, some families do a combination of term and permanent. For example, families might purchase a small whole life policy and a large 20-year term policy that will keep them until the kids get out of college. Then when the term goes away, they still have the permanent policy.
Smith also recommends getting a policy for children as early as possible because the older you are, the more expensive insurance becomes. For State Farm, you can purchase a policy as soon as the newborn reaches 14 days.
“The significance of getting it at that age is that you’re never going to be in better health than you are at that point, and then you’re locked into the lowest rate,” Smith says. “It’s affordable...and if you get one that builds cash value, which most people do because you’re getting it so much less expensive, then you can utilize those funds for college, buying their first car, helping with buying their first home, or use on their wedding.”
Taking Care of Those with Special Needs Children
Dan Goodwin, a financial advisor who works with special needs families to ensure the quality of life for their children after the parents pass away, stresses the importance of planning ahead.
“We try to do a comprehensive financial plan for them with a special needs focus, so we look at everything: how do we pay down debt, how do we pay for retirement, et cetera,” Goodwin says. “The ultimate goal is to make sure the quality of life of the individual with special needs isn’t harmed or disrupted when the parents die.”
Goodwin meets with families free of charge to look at the life insurance policy on the parents who have special needs children. Together, they work to make sure funds will go to the right place (normally a trust) and be able to serve as a financial backdrop for the child when the parents pass away.
Spouses usually name each other as beneficiaries. If the parents are both killed in a car accident, for example, all the benefits from the life insurance policy or 401(k) plan will go directly to the children and split evenly.
“If one of those kids is receiving some type of government benefit—Medicaid waiver, or something like that—then they will cross over that $2,000 threshold for Medicaid and be kicked off benefits,” Goodwin says. “That’s really hurt a lot of families when that’s happened.”
Choosing the Right Agency
When it comes to choosing which insurance company to purchase from, there really is no big mystery in terms of what it costs to insure an individual because all insurance companies use the same mortality tables to determine a premium, Smith says.
However, Smith does advise looking at factors such as how the cash value grows, company restrictions, and whether or not the company guarantees a rate of return regardless of what the stock market does.
“You want to look at a lot of the exclusions and restrictions that each insurance company places on their policies to determine whether or not you’re comparing apples to apples,” Smith says. “It pretty much costs all insurance companies the same to insure the same individual, but it’s those added benefits or added restrictions that you have to be careful of when determining which policy to purchase and from what company to purchase from.”
In addition, Goodwin suggests finding a life insurance company that’s been well established and will be there to payout in the end.
“[You] definitely want to look at a company that is going to be around for a while,” Goodwin says. “[Maybe] they’ve been around for 10-15 years, but sometimes those companies are mismanaged. What sounds too good to be true [usually is].”
Both insurance agents recommended researching companies before making a decision, and that the type of plan each family should purchase should be determined on a case-by-case basis.
“There’s a lot of different ways to do insurance planning,” Goodwin says. “It really depends on the individuals and what their needs are.”