Many experts agree that even if an individual has life insurance coverage in force, it is a good idea to re-evaluate the need for coverage every couple of years, or whenever a major life event occurs such as marriage, divorce, the birth or adoption of a child, or the purchase of a new home.
Most major life events either increase or decrease financial responsibility. And with that, the current life insurance coverage that is being carried may be too little, or too much. At least every couple of years, individuals should take a close look at their overall financial needs. New responsibilities and possibly additional debts can make a big difference.
Another reason to re-evaluate coverage is if an insured currently owns a term life insurance policy that is nearing the end of its coverage period. If a policy is nearing the end of its term, coverage may need to be extended, especially if an insured still has young children.
Changes in health are another time to re-evaluate life insurance coverage. If an insured has experienced health issues and they have a term policy that is near the end of its coverage length, it is a good idea to inquire as to whether the term policy has a convertibility feature. A convertibility feature on a term life policy will allow an insured to convert the policy from term to permanent, without having to show evidence of insurability. Converting the term policy to a permanent policy can ensure that coverage will never run out, even if an insured’s health condition worsens. This would be a great option for someone who was diagnosed with multiple sclerosis or some other health condition near the end of their term. Instead of having to pay the much higher life insurance for someone with multiple sclerosis they could pay a little more and convert to the permanent policy.
Conversely, if an insured’s health has improved since they purchased a life insurance policy, they may want to shop current life insurance rates to obtain a new policy. For instance, if an insured person has quit smoking but is still paying smokers life insurance rates, there is the possibility that the insured can purchase a new policy with lower rates.
Even without health issues, it is wise to shop current insurance rates every couple of years. Sometimes rates fall, so it never hurts to do some comparison with similar coverage amounts on new policies.
An insured’s current or expected future financial aspects change over time, too. If a job has been lost or investments have lost value, an insured may not have as much financial cushion as they had in the past. With this in mind, it may be time to increase life insurance coverage.
Regardless of the reason, if an insured currently has life insurance coverage and is applying for a new policy, it is important to note that they should not cancel their old policy until a new policy is in force. Otherwise, they run the risk of being without coverage at all if the new policy is not approved.
Which is Better – Term or Permanent Life Insurance Coverage?
If you have determined that you need more life insurance coverage, the next question to ask is whether you should purchase term or permanent coverage. In some cases, one or the other may be the better option – and in other instances, it could be that buying some of each will be the better bet.
Permanent life insurance policies have two components – a death benefit component, and a cash value component. This type of insurance offers an insurance portion that pays a set amount of death benefit upon the death of the insured. It also offers a cash value or investment portion that builds up cash value that the policyholder can either borrow or withdraw for whatever reason they see fit.
The most basic form of permanent insurance is whole life insurance. Whole life insurance offers a way to accumulate wealth as the premiums paid into the policy pay towards the death benefit proceeds, as well as towards equity growth in a savings type of account. In essence, a whole life insurance policy combines the benefits of a term policy with that of a savings account.
During the first several years of a whole life policy, a smaller portion of the premium goes towards the cost of providing life insurance. However, as the insured ages, the cost to provide life insurance rises. Therefore, as time goes on, more of the premium goes towards the cost of providing death benefits and a smaller portion goes towards funding the cash value component.
Over time, as the cash value component grows, the policy begins to accumulate what is called a cash surrender value. Should the insured ever decide to cancel, or “surrender,” the whole life insurance policy, he or she would receive the amount of the cash surrender value.
Whole life insurance consists of many advantages. First, although the premium on whole life insurance may start out higher than term insurance premiums for the same amount of coverage, the premiums on whole life stay level throughout the entire life of the policy. This makes the policy much easier to budget for over the long term. Whole life insurance also offers a minimum guaranteed death benefit. Since those insured by whole life never have to requalify, they can count on a specific amount of death benefit for their survivors at a premium that never changes.
Certainly another benefit of whole life insurance policies is that they build cash value. And, this savings element allows insureds to build cash value on a tax-deferred basis. Also, the policy owner can cancel or surrender the whole life policy at any time and receive the accumulated cash value.
If an insured owns a participating whole life policy, they have the opportunity to earn dividends. These dividends provide many advantages, including additional cash value or increased death benefit.
Whole life insurance policies also offer the opportunity for additional retirement assets. For example, the insured can convert their whole life insurance cash value to a fixed annuity and use the income for retirement, or they can cash out and use the money for emergency funds or other bills.
Term life insurance is the most basic of all life insurance policies. A term policy is purchased for a specific amount of time, such as one year, ten years, 20 years, or other time periods set by the offering insurance company. In return for a premium payment, the insured’s beneficiary will receive an amount of death benefit proceeds. Term life insurance policies do not build up any cash value, nor do they offer any investment component.
Term insurance is known for its inexpensive coverage – especially for younger insureds. A healthy 35-year-old non-smoker can typically purchase a 20-year level premium term life insurance policy with a $250,000 death benefit for between $20 and $30 per month.
Some of the main characteristics of term life insurance include temporary insurance protection, low cost, usually renewable, no cash value, and sometimes convertible to a permanent life insurance policy. Term life insurance has a very specific coverage period. Thus, the name term insurance – a policy is purchased for a specific term, or period of time. With term insurance, the insured pays premiums throughout the length of the term. Once the term is over, the death benefit and the policy expire. This is why term is the most inexpensive of all life insurance coverage.
When compared to most other types of life insurance, term insurance is quite a bit less expensive. Therefore, term life allows an insured to purchase a great deal of pure life insurance coverage for a very reasonable amount premium. Term insurance covers an insured for a very specific period. This allows an insured to purchase the amount of coverage that they will need, especially if they are purchasing protection for a specific reason. For example, an insured may purchase a 15-year term life policy if he or she has a 15-year mortgage on their home. That way, if they were to pass away, their family would be able to pay off the mortgage and remain in the home.
This is very useful for people who need high risk policies. For instance, diabetics looking for life insurance will get much lower rates with a term policy over one of the permanent life insurance policies.
How to Determine the Best Life Insurance Policy for You
When determining the best plan for you, it is wise to compare insurance policies, features, and premium quotes. When you’re ready to begin the process, fill in and submit the form on this page.
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