How to Choose an Appropriate Life Insurance Policy

Life insurance has been recognized as one of the basic step to achieve financial security. It protects families to suffer dramatic financial setback or disaster in the event of unexpected death on top of emotional lose. However, choosing an appropriate life insurance policy that fits your need could be challenging. You will have to study so many types of products, understand confusing terms and jargons, and choose genuine advice from profit driven sales pitches.

Shopping for financial products is actually quite similar with shopping for other items. The most important thing is to know exactly what you need. To help you to make better decision, a few questions need to be clarified by yourself before you go out shopping for the best rate.

First, what is the purpose for you to get life insurance?

Yes, protection is always the first purpose. But, what triggers you to consider buying it. Is it because you just purchased a house, and worried how your family can afford to continue paying off the mortgage is something happens to you? Or you just have had a new baby, and want to make sure he/she will be OK financially? Or you want to leave behind some money so that your spouse will be taken care of when you are gone?

By answering this first question, you will have a good idea of what type of life insurance policy you need. If your answer is yes for temporary need, term insurance should be your choice. If there is no definable time when you need the coverage till, you should consider permanent insurance.

Second, how much coverage you will need?

“The more, the better”…only if you don’t mind spending extra money on premium. Instead of throwing around ideas, you can actually calculate a solid number to start. Depending on the answer of the first question, your number could be very different. If your purpose is to cover debt, knowing how much debt you currently owe is a good start. If you worry about your children, you can start with your current income times the number of years left for them to be financially independent, say age of 18 or 22. Of course, you should always include final expense, which is about $10,000. The rule of thumb, the amount should be enough to allow your family maintain similar level of current lifestyle financially.

Third, how long do you need the coverage for?

Now, you can easily answer this question based on the answers for the previous questions. For example, if covering the mortgage is your main purpose, you might need term insurance for 25 years, depending how long it will take to pay off the mortgage; or if you want to protect your child, then 20 years or 25 years will be a good benchmark considering of their age; of course, if for estate purpose, you will need permanent insurance.

Last, but not least, how much is your budget?

Paying for life insurance is a long term commitment. You need to look at your monthly cash flow and know exactly how much within your comfortable level you can allocate. The premium is decided by the age, gender, heath condition, death benefit amount and the type of insurance policies.

A lot of times, combination of more than one policy will give you the most cost effective way of getting all the benefit. Here is an example:

Susan is 35 years old with two kids aged at 1 and 3. She would like to take life insurance policy to protect the mortgage payment which is 20 years, and continue to provide financial support for her kids before they become independent. She also wants to leave behind some money to her family for estate planning purpose. After calculation, she needs $1 million dollar coverage for 20 years, and $200,000 coverage permanently.

Solution 1: She takes $1 million permanent life insurance; the premium is about $350 monthly minimum.

Solution 2: She takes $1 million term life for 20 years; the premium is about $85 monthly. But if she renews the policy after 20 years, the premium will jump to $1,000 a month, and only cover her up to 85 years old.

The recommended solution: take $200,000 permanent policy with extra $800,000 term for 20 years; the premium will be about $150 monthly. She will get $1 million coverage for 20 years, and $200,000 permanently.