BBB Advice on Life Insurance

Life insurance is an important aspect of financial planning. However, finding a policy that fits your budget and financial goals can be a real challenge with so many options available. In fact, a 2022 study revealed that people who don’t feel knowledgeable about life insurance are less likely to have coverage. The Better Business Bureau recommends the following tips to help you decide if you need life insurance, what kind of insurance is best for you, and how to purchase a policy.

Determine if you need life insurance coverage. Life insurance is practical for many, if not most, people, but there are situations where you might not need it. You should definitely consider purchasing a policy if: You want your funeral and burial expenses to be paid without eating into your assets; Loved ones depend on you financially and would need significant financial support if you passed away; Your family would be left with a large debt in the event of your death; You want to pay for a dependent’s childcare, tuition, or retirement expenses, Or if you wish to leave a charitable legacy behind for a cause close to your heart. If none of these situations apply to you, you may not need life insurance.

Think about how much life insurance you need. Consider the financial needs of your beneficiaries to determine how much insurance you should buy.

Get to know the different types of life insurance. Term life policies generally have lower premiums than permanent policies, as they only cover a specific term of your life. They typically last between one and 30 years. The longer the term, the higher your premium will be. Once the term ends, you stop paying and no longer have coverage. Generally, no cash value is given back to the insured when the term is complete. That said, some life insurance companies may allow you to extend the term of your policy or convert it to a permanent policy, and in a few cases, they may offer a return of premium (ROP). A term life policy is a good choice for someone on a tight budget or who only wants life insurance for a specific time. Worth noting, too, is that if you have a group life insurance plan from your employer, it’s likely a term policy that ends when you leave the company.

If you are looking for coverage that will span several decades until your death, you’ll want a permanent life insurance policy, sometimes called a “whole” or “universal” policy. Permanent policies cost more, but they have extra benefits, such as receiving the policy’s cash value if you terminate it early and borrowing the amount of the current cash value from the insurance company as a loan. There are a few different kinds you can choose from:

Whole or ordinary life insurance. The most common kind of permanent life insurance, this kind of policy is straightforward. It offers a death benefit and works as a savings account. You agree to pay premiums for a specific death benefit, and the company agrees to pay you dividends periodically. Usually, this kind of policy includes a guaranteed interest rate and predictable premium rates over the course of the policy’s life.

Adjustable or universal life insurance gives the policyholder more flexibility than whole policies. Sometimes, you can increase your death benefit by passing a medical exam. In addition, you can choose to pay more than your premium up to a limit, and the extra money goes into your cash account. Or you can pay less than the premium and draw from the cash account to cover the difference. These options make this kind of plan appealing to workers with fluctuating incomes. With universal life insurance, the cash value account usually earns interest based on current market rates, which can change over time. All these factors mean this kind of policy needs to be monitored regularly by the policyholder. Keeping an eye on your policy’s cash value will help you avoid a lapse in coverage, especially if you pay less than the minimum premium on occasion.

With variable life insurance, policyholders receive death benefits, and they can also use their cash value account to invest in stocks, bonds, and money market mutual funds. This means there is a potential for growing the value of your policy quicker, but there is quite a bit more risk involved. One example of variable life insurance is indexed universal life (IUL), which is best for someone with a good understanding of the stock market, fees, and forecasts. IUL is gaining popularity, but without at least some investment experience, it can be easy to allow coverage to lapse. Plus, market crashes could mean you must pay higher premiums to keep your policy in force.

Compare life insurance companies. There are many providers to choose from, so you’ll want to do comparison shopping. You can contact an insurance agent, a broker, or an insurance company directly to get help comparing policies and pricing, or, in many cases, you can comparison shop online. Once you’ve narrowed down your selection, ensure the companies you are interested in are licensed and have a good business reputation. Read reviews, look up the company on BBB.org, and ask your friends and family if they have any experience with it. Take the customer service level into account, along with the company’s financial rating. Remember that the financial rating they’ve received is a projection, not a guarantee.

Watch out for mail-order life insurance. You may get offers to buy life insurance through the mail at attractively low prices. The pitch may say you will be approved regardless of age and health. Be careful. Never purchase such a policy until you have read and understood every word, not just the advertising. Also, check with state insurance authorities to find out if the company is licensed to sell insurance in your state.