What is the Most Important Thing to Know When Buying a Life Insurance Policy?

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What is the Most Important Thing to Know When Buying a Life Insurance Policy?

January 16, 2019 Home Insurance 0

Document of Life Insurance Policy for background

Hands down, the most critical issue when buying life insurance is you knowing your purpose of the life insurance.  The purpose will determine which policy or combination of policies you should consider. Some common scenarios for life insurance include:

 

  1. Family protection
  2. Charitable gifts
  3. Business Buy-Sell Agreement funding
  4. Business protection (key employee insurance)
  5. Estate planning

 

There are thousands of different life insurance policies.  Choosing the best policy does not have to be overwhelming.  In fact, the process may be much simpler than you perceive.  Use the following two step process.

 

Step 1: Answer these five questions:

 

  • What is the purpose of your life insurance?
  • How much life insurance do you need?
  • How long do you need the life insurance?
  • What is your budget?
  • What is your current and past health conditions?

 

Step 2: Understanding the two primary types of life insurance policies.

 

  1. Permanent Life Insurance – monthly premiums are higher than term insurance.

 

 a. Whole Life – premium and death benefit are guaranteed to age 100 or age 120.

 

 b. Universal Life – subject to weak guarantees.

 

c. Indexed Universal Life – yields tied to the stock market.

 

 d. Variable Universal Life – yields based on specific investments.

 

  1. Term Life Insurance 

 

        a. Level Term – premium and death benefit stay the same over a selected period of time (97% of term life bought is level term *).

 

          b.  Decreasing Term – premium stays level, but the death benefit decreases.

 

 

 

With the basic knowledge of the types of policies and answers to your specific questions, you can determine the best life insurance policy.   There are many people that believe “term insurance is the only way to go”, but I respectfully disagree.

 

If you have a specific time frame for the need of life insurance policy, a level term product is hard to beat.  For example: You purchase a $250,000 home and have a 30-year loan.  If the purpose is to cover the mortgage, a 30-year level term policy will be good choice.  However, there are numerous scenarios where permanent insurance is superior to term insurance.  If you know your need will extend to your death at any age, permanent insurance will be superior.  An individual that establishes a trust to buy life insurance to pay for estate taxes is a good example.

 

WARNING: BE SURE YOU GET A POLICY WITH GOOD GUARANTEES!

 

 

 

These tips might be helpful:

 

  1. Strong guarantees are a must!  Many policy holders have lost a ton of money due to universal life policies with poor guaranties.  You can search online with the phrase “life insurance class action lawsuit” to comprehend this warning.
  2. If you are using the policy as an investment, be very careful.  Keep your investments and your protection (life insurance) separate.  If your life insurance accumulates cash value, that’s fantastic.  Just do not count on the cash accumulation.  Always consider the guaranteed accumulation amount.
  3. Beware of the agent that is constantly pushing universal life.  The premium and agent’s commission are much higher with permanent insurance than term insurance.
  4. There are websites that will provide you with 40+ term insurance quotes.  A good life insurance agent will represent companies with comparable or superior products.
  5. Find an agent that represents “A+” A.M. Best or better rated life insurance companies.
  6. Find an agent that will be patient and provide you with choices.
  7. Count the life insurance that is provided by your employer as gravy.  Generally, the group insurance is dependent on employment.  You leave employment, you lose the life insurance.
  8. Something is better than nothing.  If your budget cannot handle your $750,000 need, lower the amount.

 

If you need assistance or have any questions, contact Independent Insurance Counselors at 281-331-3131 or mike@insurancetexas.net.

 

*https://www.iii.org/article/what-are-principal-types-life-insurance

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