Life Insurance is one of the most confusing topics in Financial Planning but it is a necessary part of the process.
How Do I know which type of Insurance to choose?
let’s make things simple.
There are essentially two types of insurance.
- Permanent Insurance ( Whole Life, Guaranteed Universal Life, )
- Temporary Insurance(Annual renewable term, return of premium term, 10,20,30 year term )
If you are thinking about buying life Insurance how do you determine which one you need.
Really, there are only 2 questions you need to ask yourself:
1.) What do I want this policy to do for me if I die?
2.) How long do I need the policy to protect me?
Those questions are important because it allows you to determine the type of Insurance you should buy.
Although insurance goes by many different names there are essentially two types: Temporary or Permanent
#1. Temporary Life Insurance
Temporary Insurance has an expiration date. it is designed to last 10 years, 20 years, or 30 years.
The Insurance company is on the hook until the term expiries.
If you have personally saved up enough money in that time frame to no longer need life insurance then the insurance contract accomplished what you wanted it to. It protected you and your family while your savings were growing.
Once that period of time expires you can renew your coverage or purchase another policy if you still need insurance. In most cases it will be far more expensive to buy if you qualify. If your health has made you to risky from the companies view point they won’t give you another policy.
The number one reason why people buy Temporary Life Insurance is: It’s Cheap!
Just like its cheaper to rent a car than it is to buy a car. It’s cheaper to rent life insurance for 20 years than buy the type that last forever.
Maybe you want your home to be paid off if you die young or maybe you want to replace your income for your family if you die before retirement.
This means once the term expires you don’t need it anymore.
Pros and Cons of Temporary Life Insurance:
Pro – Cheaper
Con – Temporary
#2. Permanent Life Insurance
This type of insurance is designed to last forever. You make payments each month, whenever you die this type of insurance will pay out to your beneficiaries even if you live to be over a 100.
It is also possible to buy insurance that you pay for while working and when you retire you no longer have to make payments but you get to keep your life insurance
Example: A Client at age 30 pays policy for 30 years then stops making payments but gets to keep insurance for the rest of there life.
The number one reason people buy Permanent Life Insurance is so that they have the peace of mind knowing that it will always pay out no matter how long they live.
Let’s go back to that question at the beginning, Why do I need life insurance?
Maybe you want your mate to have extra money in retirement if you die before them. Maybe you want to leave money to your children as an inheritance
If that is the case a permanent policy might be better to address these needs
Pros and Cons of Permanent Life Insurance:
Pro: It never expires
Con: It cost more because it does more.
Conclusion: There is no cookie cutter approach to this part of financial planning. The decision you make should be based on your individual needs, goals, and situation. A Life Insurance Broker can help you get a clearer picture of which type of policy you need so that you can have the peace of mind of knowing your policy will do exactly what you want it to do.
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