Life insurance is both simple and complex
Life insurance is an inherently simple concept and subject. You contract with a life insurance company to pay your beneficiaries a specified amount of money when you die. Simple.
However, the choices of coverage that life insurance companies make available to you can be complex and challenging to evaluate. As usual, the more choices and options, the more care you must exercise in examining the pros and cons. You want to avoid making any crucial mistakes in this important coverage.
Also, you should be aware of the differences between term life and whole life as components of your overall insurance protection plan. Experts would typically advise you to view affordable life insurance, whether term or whole life, as part of a plan, not as an individual product. You should choose the best life insurance product that "fits" your long-term overall financial and insurance plan as designed by you or your financial adviser.
See also: Whole vs. term life insurance
Some important considerations
Life insurance and its subtleties require evaluation and understanding to enable you to select the best solution for your current and future situation. Unlike auto or homeowners insurance, which tend to be "black and white" issues, life insurance is more subjective and dependent on a grander plan for your future.
For example, if you choose to own a business, home, or other major assets, you'll want to protect them should something dire befall you. Any outstanding loan balances should be protected so your family can keep or sell these assets without undue pressure
Should you choose to use life insurance as a component of your overall investment or retirement plan, other issues are important. For example, in addition to protecting your future earnings (which is a primary purpose of life insurance), large assets, and mortgage loan balances, you might also desire an additional account to build up cash value and grow over time.
When you need access to these funds for investment, emergency, or regular income, you will enjoy another fund to provide this money. Earnings on this account may also be tax deferred, allowing your fund to grow without tax consequences until you withdraw monies from it.
Life insurance can be a perfect choice to protect your business, too. Here is an example of how this program might work. You and a partner own all stock in your company and both of you are heavily involved in management. Your accountant or financial adviser estimates the value of the business at $700,000. An insurance adviser creates life insurance policies of $350,000 for each of you, payable to the other partner or to your beneficiary in the event of your demise.
In return, the beneficiary will sign over all outstanding stock they will now inherit. This plan gives the surviving partner complete control of the business, without any problems from new major stockholders who may be totally ignorant of the operations of the business.
An often-overlooked subtlety of life insurance is the financial condition and stability of the companies offering protection. People sometimes become so involved in seeking the highest level of protection at the lowest possible cost, they forget to evaluate the life insurance company along with the terms of coverage.
Why is this so important? Here is a parallel example. You decide to deposit your life savings in a bank that's offering the highest interest rate in your area. You don't investigate its financial condition because the Federal government insures your account. Nine months later, the institution fails and is taken over by the FDIC (Federal Deposit Insurance Corporation).
Only then do you learn that all the interest you've earned is gone, as earnings are not covered by insurance, and your insurance is limited to the first $100,000 and you've got a bit more on deposit. That balance overage is also not covered.
Look at all companies you're considering just as you should a financial institution. Paying premiums over a number of years to maintain an insurance amount sufficient to protect your family and possibly enjoy a cash build up that is impressive is wonderful. Then, your insurance company fails! In this situation, you don't even have Federal insurance or any other protection. This becomes a simple business failure.
Therefore, always examine the stability of a life insurance company. You can use the Internet or the library. Visit companies, like A.M. Best, that rate the financial condition of insurance companies. Try to ensure that your life insurance and/or savings will be there when you need them.
