Tips to Buy Permanent Life Insurance (Part 2)
Money Girl helps you understand permanent life insurance and gives 5 tips for buying it.
Laura Adams, MBA
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Tips to Buy Permanent Life Insurance (Part 2)
This is the second episode in a 2-part series about whether you should buy permanent life insurance. In part one I covered the differences between permanent and term life. And I reviewed one common type of permanent policy called whole life. So be sure to read episode 312 for more information.
In this episode we’ll cover 2 more types of permanent life policies: universal and variable. Plus you’ll learn 5 smart tips to buy permanent life insurance if it’s right for you.
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Types of Permanent Life Insurance
There are 3 main types of permanent life insurance: whole, universal, and variable. Although the benefits they provide are different, each type covers you for your entire life. Term life insurance, on the other hand, only pays a benefit if you die during a specified period of time, such as 10 or 20 years.
Here’s a summary of the 3 types of permanent life insurance:
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Whole life insurance gives you a guaranteed death benefit and a guaranteed rate of return on your cash value, when you pay a fixed annual premium. This is the most straightforward type of permanent life policy—but it’s also the most expensive because it comes with no risk to the buyer.
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Universal life insurance doesn’t offer the guarantees of a whole life policy, but it has much more flexibility. For instance, you can reduce the death benefit of a universal life policy to save money as your needs change from year to year. Or you could increase the benefit (as long as you’re still healthy) and keep the same policy.
You can even reduce or temporarily suspend premium payments on a universal life policy if you have a financial hardship. Or you can pay more into the policy to take advantage of higher returns when interest rates go up.
When you buy a universal life policy, you’re given a sales illustration that estimates your annual premium that’s necessary to fund the policy for life. Though premiums are less expensive than a whole life policy, they aren’t guaranteed. The cost of the policy could increase up to a maximum amount if interest rates go down.
If you can’t afford to pay higher premiums, you may be forced to cancel the policy. This is the major downside of universal life.
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Variable life insurance is a policy in which your cash reserves are invested in securities, such as stocks, bonds, and mutual funds. It’s similar to universal except that you choose how to invest your money from a menu of options. Variable life gives you the most flexibility and risk of all the permanent policies.
If the investments you choose perform well, your cash value could skyrockets above what you could typically earn from a whole or universal life policy. But the bad news is that if your investments don’t perform, you could lose part of your cash value.
And if your cash value declines, it’s up to you to make up the loss by paying higher premiums to fund the policy for life.
5 Tips for Buying Permanent Life Insurance
A permanent life insurance policy isn’t for everyone. However, if you want to make sure that certain people, organizations, or the taxes on your estate are taken care of no matter when you die, consider buying one.
Here are 5 tips for buying a permanent life insurance policy:
Tip #1: Buy permanent life insurance only when you have a need for it—never purely as an investment. There are hidden upfront fees and expenses which significantly reduce the potential return on your cash value.
Tip #2: When buying universal life, chose a premium payment based on a very conservative interest rate, such as 3% or 4%. This will prevent you from having to pay higher premiums down the road.
Tip #3: Consider buying term life insurance with the option to convert to permanent life. Since you don’t know how healthy you’ll be at the end of a term, having this option will allow you to maintain life coverage.
Tip #4: A general rule of thumb is to buy life insurance that’s at least 10 times your annual income. If you have children or other family dependents, always err on the side of buying too much coverage rather than too little.
Tip #5: If you get life insurance through work, don’t rely on it exclusively. Although you can get a limited amount of group life coverage even if you’re in poor health, if you leave the company you lose the insurance.
Since life insurance is a complex financial product, be sure to do your homework and ask lots of questions before buying it. But don’t procrastinate buying a policy! If your health takes a turn for the worst, life insurance could become unaffordable. It’s easy to get life insurance quotes using a free site like InsuranceQuotes.com.
No matter if you earn an income or are a stay-at-home parent, consider how your death would affect the finances of those who survive you. If a spouse, dependent, or any other loved-one would suffer a financial loss without you, you’re the perfect candidate for life insurance.
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More Articles and Resources You Might Like:
InsuranceQuotes.com – get free multiple life insurance quotes
Should You Buy Permanent or Term Life Insurance?
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.