The decision to purchase life insurance is very important. It is a key part of your financial plan. It pays your final expenses, provides funds to replace your lost income as well as to settle debts such as a mortgage, medical expenses, credit cards, or student loans. However, many individuals buy life insurance based solely on the cost of the premium without considering the features and benefits of the policy as well as how it meets their overall life situation. So what things should you consider when looking to obtain a life insurance policy?
Let’s start with the base policy. The death benefit is the major feature of any life insurance policy. Ask yourself is the benefit payment going to be enough? Will it keep pace with inflation? These two questions are crucial if you have debts such as a mortgage or future plans for sending a child to college. Another thing to consider is what else is offered as part of the base policy at no charge. For example, many insurers offer an Accelerated Death Benefit. This rider allows the insured to access a certain percent of the death benefit in the event of a terminal illness. If you have a family history of terminal illness this benefit could cover a large portion of the medical bills. Some insurers offer this benefit as a rider for an additional cost but why pay an added charge if you don’t have to? Finally, if you are looking at a Whole Life or Universal Life Policy, the Cash Value will need to be considered. Will the interest rates build the cash value you need to help meet any goals or challenges, especially during your retirement or if you are in a high-income tax bracket? Also, does the insurer have a past history of paying yearly dividends? When looking at the base policy make sure it is aligned with your individual needs and financial goals in a cost effective manner.
The next thing to consider in obtaining a life insurance policy is the choice of riders that can be added to it. Riders allow you to further design a policy to meet your needs and goals. Most riders come with an added charge, but some policies have free riders such as the Accelerated Death Benefit Rider described earlier. The following is a summary of the most common riders.
- The Waiver of Premium waives the premium payment if you become disabled as defined in the life insurance policy. If you work with machinery, chemicals, or any area that requires heavy exertion or heat exposure, this rider would be appropriate.
- The Accidental Death Benefit pays an additional benefit if your death is accidental. If you drive long distances regularly to work or school, work as a professional driver or delivery person, or work in construction or a construction related field, you should consider this rider.
- The Option to Purchase Additional Insurance allows you to purchase additional coverage at specified dates in the future regardless of health or occupation. This rider is a great planning tool to protect your growing assets, your family, and your income as well as protects against inflation. If you are anticipating a salary increase, having children/more children, or assuming the care of an aging parent/relative, this rider would be valuable.
- A Term Rider allows you to buy temporary additional coverage on yourself without the expense of getting another policy. This is a great way to help protect your assets from temporary or short-term debts associated with accessing a line of credit or a home equity line.
- The Child/Family Rider allows you to buy temporary additional coverage on a child or other family member without the expense of getting another policy. This is useful for final expense coverage or as starter coverage for a child.
- A Long-Term Care Rider allows you to pay for qualified long-term care expenses. This rider is ideal for individuals with a family history of long life spans and/or who want to avoid tapping into their other assets to pay for long-term care expenses.
Life Insurance is a major component of your financial plan. Choosing a policy based only on the premium could be harmful in the long run. In short, you "get what you pay for". It is important that you evaluate and design a policy to meet your financial needs and goals. A financial advisor and/or a life insurance agent will work with you to make sure you have the right coverage.
Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor. He is an Investment Advisor, Life Insurance Agent and does Financial Planning. If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.
(Life Insurance Benefits could be subject to the claims paying ability of the Life Insurance Company.)
