8 Tips Before You Buy Life Insurance

1. What types exist? - Term and permanent. Term insurance usually lasts for a period of 10-30 years, decided by you. Permanent lasts until death and also has a cash value that accumulates while you are still alive (and disappears if the death benefit is paid out).

2. Which type should I get? - Term is generally much less expensive than permanent. 80-90% of people are better off with term life insurance. If you buy life insurance (term) when your children are young, by the time the coverage ends (when they are in their late 20s or early 30s) they will not depend on your income any longer. Permanent is reserved more for special cases, such as those who look after someone with special needs or if they wish to leave an estate in excess of 2.5 million dollars (in this case the death benefit would pay for the estate taxes).

3. How much coverage will I need if I buy life insurance? - The amount you need is determined by information such as your salary, number of dependants (people that rely on your income), current debts (mortgage) and future debts (college education for your kids?). You want to make sure all this is covered with room to spare. With all of these totaled up (using an online insurance calculator), the general rule of thumb is to add 25-30% more.

4. Will I need a medical exam? - If you wish to buy life insurance by yourself, not part of an employer-offered group plan, this is important. If you are young or in good health, you probably won't need a medical exam. The older you are and the more coverage you wish to have, the more likely you are to need one.

5. How do I minimize my premium cost? - If you are a smoker or are overweight, your premiums will be inflated. Your rates can drop after being smoke-free for over a year. Since insurance companies use statistics such as BMI (body mass index) to calculate premium costs, losing weight will inevitably lead to lower premiums. Premiums often remain constant from the time that you initially buy life insurance.

6. Does the death benefit ever diminish? - In most cases, it will never decrease. One variation of variable life insurance has decreasing death benefits. If you are about to buy life insurance, it is always good to ask such a question.

7. How often do I pay my premium? - Premiums are generally paid on a annual (and sometimes semi-annual) basis. Often these premiums can be paid online.

8. Will the beneficiary of the policy have to pay tax on the death benefit? - Beneficiaries usually do not pay taxes on death benefits.

Is Life Insurance an Investment? ?

For years and years, many people viewed life insurance through a single lens, as a necessary hedge in the case of one's death to help provide for heirs, for a spouse, to help cover personal loans or business loans, etc. Life insurance for some was simply an option checked off as one of the "benefits" received through an employer, and no further thought even needed to be devoted to such a remote possibility as one's passing.

Lately, though, some advisors are recommending that life insurance be considered an "investment". Why? In part, because of volatility with the stock market-as equities (that is, "stocks") go up and down based on seemingly nothing more than investor's emotions, it's distressing to see a portfolio-especially a retirement portfolio-shrink to almost nothing.

Certain policies, however-even if they are invested in the market-carry with them certain guarantees of protection of principal, etc. Of course, the investor (in this case, the life insurance policy owner) pays for those guarantees in the form of fees and charges, but that may be a price certain investors are willing to sacrifice in return for protection of a "nest egg".

So is life insurance as an investment the way to go?

The answer is that if you are looking for whole life ONLY as a way to provide for heirs, you are often best served by purchasing a term policy in an amount that will cover major expenses (discuss this with your advisor). Those types of policies are often the most cost-effective.

If you are looking for an investment to protect a part of your portfolio, insurance may NOT be the most cost effective solution. There are exceptions, though, in terms of estate planning and gifting-for which insurance can be an excellent means to protect a portion of an estate that one is planning to pass along to an heir (meaning, a portion of your portfolio that you will not need access to for income.)

Typically, those who can benefit from insurance as an estate planning strategy are those who have an estate above the federal exclusion amount (right now, that amount is $3,500,000). When such an estate is passed along, estate taxes of 55% are assessed. However, if a portion of that estate/portfolio is as part of a permanent whole life policy, payable on the death of the owner, the beneficiaries are not assessed taxes for that part of the estate.

The other use for such permanent life insurance is "gifting"-passing along a portion of your estate to a charity or a specific heir-by making that entity the beneficiary of a life insurance policy.

If you don't fall into one of those categories-for example, if your estate is not above the three and a half million mark-is insurance as an investment not for you? You may find that wealth transfer strategies and estate planning (for any size estate) can benefit from judicious use of life insurance policies. It is worth a conversation with your advisor.