海角大神

Welcome to the third entry in my 鈥淯ltimate Guide鈥� series here on The Simple Dollar. If you want to hop back to the first two, here are some quick links:
Ultimate Guide to Choosing an Internet Service Provider
Ultimate Guide to Amazon Discounts

Today, we鈥檙e taking a deeper look at life insurance policies. Life insurance is one of those sticky things that feel like a needless expense until you need it鈥� and then you聽really聽need it.

For me, life insurance really didn鈥檛 become an issue until my wife and I started having children and we started seriously evaluating their future. What would their life be like if I suddenly passed away? Would Sarah be able to adequately provide for them as they grew older? What if聽both聽of us passed away suddenly?

We did a lot of research, shopped around, and eventually wound up with policies that protect each other and, more importantly, protect our children. This guide will walk you through many of the key facts and concepts we learned during that journey.聽

Life Insurance Types 鈥� and Why Term Is the Best for Most People
There are a聽lot聽of different kinds of life insurance policies floating around out there with different names and attributes associated with them. Universal, whole life, cash value鈥� you鈥檙e going to hear these terms bandied about by life insurance salesmen.

Here鈥檚 the truth of the matter:聽the vast majority of them amount to an ordinary term life insurance policy bundled with something else, usually an investment of questionable value.

So, let鈥檚 back up. A聽term life insurance聽policy is one that covers a certain amount of years 鈥� say, thirty, for example. Once that agreement is signed, you pay the company issuing the policy a small amount 鈥� the premium 鈥� on a regular basis. If you were to die before the end of that term and your premiums are paid up, the beneficiary of your policy receives the value of your policy. If the term ends and you鈥檙e still alive, both you and the company walk away.

So, what makes this better than other policies?聽Cost.聽A term policy is going to be far and away less expensive for the amount of insurance you get as compared to other policies.

Other types of policies are largely term policies with special additions written in鈥� but those special additions are costly. Some policies add in an investment aspect, where the investment returns poorly for the first twenty or thirty years (some of them do well after a significant period of time, but that first period isn鈥檛 good). Others pledge to cover your whole life, but they end up being very expensive, too.

The best method of all is to聽simply buy a term policy and pair it with some savings of your own.

What happens if you reach the end of the policy? If you鈥檝e been saving, you shouldn鈥檛聽need聽a big insurance policy at that point. Big insurance policies make sense when you have several dependents, but when the term of the policy runs out, you shouldn鈥檛 have many dependents at all, so you don鈥檛 need that big influx of cash.

Some people may not be eligible for some policies.聽Life insurance is a product sold by a company that wishes to minimize their risk, and if you have significant risk factors that indicate a higher chance of the company having to pay out on your policy, you may have to pay higher premiums or not have insurance at all. On the other hand,聽don鈥檛 assume that you鈥檙e uninsurable, either.聽These companies know what they鈥檙e doing and can sometimes offer policies to people who might otherwise seem risky.

Even in these situations, the processes below of shopping around for policies can still point you to the best possible deal for your situation, even if the rates are high.

鈥淧eace of Mind鈥� Product
A key thing to remember is that聽life insurance is a 鈥減eace of mind鈥� product.聽It鈥檚 not something you are ever going to have to tap into. If you鈥檙e purchasing the policy for peace of mind, it should completely cover the things that you鈥檙e worried about.

That鈥檚 an important factor to keep in mind when you鈥檙e determining the specifics of the policy you need.

How Long Should My Term Be?
Should I get a ten year policy? A twenty year? A thirty year? It鈥檚 not an easy question.

Generally, the longer the term of the policy, the higher the premiums are going to be. That makes sense if you think about it 鈥� the longer the term of the policy, the more likely the insurance company is going to have to pay out.

The real question you need to ask yourself is聽why do you need this policy?聽What situation are you protecting yourself against?

Many people buy term life insurance policies to make sure that their children are financially protected through their childhood. Others might buy a policy simply to protect their spouse until retirement.

You should sit down and ask yourself聽at what point that reason is no longer relevant.聽When will your kids grow up and move out? When will you hit retirement age?

Those types of questions will point you straight at the policy term you should be looking for. Need one for the next fifteen to eighteen years? Get a twenty year policy. Need one for twenty five years? Get a thirty year policy. Are things going to be fine in eight years or so? Get a ten year policy.

How Much Insurance Should I Get?
During the process of figuring out the term of the policy, you鈥檙e also going to get a sense of what exactly you鈥檙e insuring against. You鈥檒l know how long you need that policy for and what kinds of expenses you鈥檙e hoping to cover.

The next question to ask yourself is how much money that adds up to. My recommendation is that, if you know how long you鈥檙e going to need protection, you should have enough insurance to replace your take-home income for that entire period. If you have a baby at home and you want to make sure they鈥檙e good through high school, you should calculate how much your take-home pay would be through that whole period, for example.

It鈥檚 important to remember that this is just a handy 鈥渂ack of the envelope鈥� calculation. You should also take into account your full financial picture before diving in, because a family in a lot of debt would need more insurance than a family in a strong financial position.

The best route is to contact聽a fee-only financial advisor, one that does not have a vested interest in selling you a product, and have them go over your finances with you and help you figure out the right amount for your situation. Don鈥檛 use a commission-based financial advisor for this, as they鈥檒l be primarily interested in selling you a policy.

A final piece to chew on:聽the younger you are, the cheaper your premiums will be, so if you鈥檙e a new parent at age 25 and are buying insurance to protect your child, the rates will be pretty low, even if the total amount is high, because your risk of dying before 50 or 55 is really low.

Shopping Around
So, you鈥檝e decided on a term policy and you have a good idea of what kind of term you want. What now?

The first step is to聽shop around for the best price.聽The easiest way to do that is to use a life insurance broker such as聽AccuQuote,聽FindMyInsurance, or聽LifeInsure. All of these services make it easy to compare rates among different insurers once you鈥檝e filled out some basic questions about yourself.

However, you don鈥檛 want to strictly go for the lowest rate. You are going to want to use a stable insurance provider that鈥檚 going to still be in business in fifteen years.

The easiest way to check out the stability of an insurance company is to check out their financial strength rating at an independent rating agency. For example, you can stop at聽TheStreet聽and look for the financial strength rating of each insurer you鈥檙e considering. You鈥檙e going to want to make sure that any insurer you鈥檙e seriously considering has a strong rating.

Diversification
Another step you can take to minimize your risk is to 鈥渋nsure your insurance.鈥�

Each state has a guaranty association that life insurance providers in that state must be a member of. This is a simple regulatory measure that ensures that companies don鈥檛 just sell policies and vanish into thin air, and that policies that are sold in your state have some security to them.

In each state, this guaranty association insures the policies that are sold by the members of that association. What that means for you is that聽your term life insurance policy is guaranteed up to a certain amount, even if your provider goes out of business.

That amount varies from state to state. You鈥檒l want to look up that amount by going to Google and searching for your state plus the term 鈥渓ife insurance guaranty association鈥�. The website you find will indicate the amount that your policy is insured for.

If the amount you calculated earlier is greater than the guaranteed amount in your state, you should buy two separate policies from two different companies. That way, you have two fully guaranteed policies instead of one partially guaranteed policy.

This will likely cost you a higher total premium than one policy but, as I mentioned above, life insurance is a 鈥減eace of mind鈥� product and this will ensure your peace of mind.

The Path Forward
Once you have selected your policy, your life insurance bill should become one of your most important bills each time you receive one.聽Make sure this bill gets paid.聽If you don鈥檛 pay it, then you鈥檙e no longer insured and, since you鈥檇 be older at that point, getting a new policy would be substantially more expensive.

If you find that changes in your situation changes the amount of insurance you think you鈥檒l need, you can always shop around for another policy. If that happens, you can easily terminate the old one by contacting the insurance company and dropping that old policy. If a life change happens to you, this can end up being a significant money saver.

Owning term life insurance has provided significant peace of mind for me when thinking of the future of my young children. Hopefully, it can provide similar peace of mind for you as well.

The post聽The Ultimate Guide to Choosing a Term Life Insurance Policy聽appeared first on聽The Simple Dollar.