If you have a family that relies on your income and a mortgage, you’re probably someone who needs life insurance. A life insurance payout ensures that your spouse and children can pay off debts and plan a future without your income. And buying a term life policy — which pays the death benefit only if you die within the policy’s “term,” often 10 to 30 years — is less expensive than you may think. A 30-year-old woman can buy a $500,000 policy with a 20-year term for just under $20 a month, according to NerdWallet research.
But life insurance choices can be confusing, and you might receive sales pitches from your insurance agent and even through the mail. Which policy is really right for you? Ask some extra questions if anyone tries to sell you one of the following.
‘You need permanent life insurance’
Permanent life insurance policies pay out a death benefit no matter when you die, and they’re a great fit for some people. For example, if you have a disabled child, a permanent policy will provides the financial support they need no matter when you die. Business owners might name partners as beneficiaries on their policy, allowing them to buy out the company and ensuring the business can continue. And people leaving behind very large estates (worth $5.4 million or more) sometimes buy permanent life insurance so that their heirs can pay estate taxes.
But few people fall into one of the above scenarios. If your agent recommends a permanent life policy without a specific reason, he or she might just be looking for a large commission — and you’ll be stuck with an insurance bill much larger than a term life insurance bill.
If your financial liabilities are finite (such as a mortgage or income replacement during your working years), term life is likely sufficient.
‘Life insurance on your child is a wise investment’
There are some reasons to buy a life insurance policy on children. If they’re predisposed to health issues that will make buying insurance difficult once they’re adults, you can lock in coverage early. Or if they’re older and you’ve co-signed on their debt, you could protect yourself with life insurance on them.
But it’s unlikely that your children will develop serious health problems before they have a chance to buy their own policy. And other common reasons that agents might pitch, like providing a source of cash value to pay for a house down payment or college, simply don’t make sense. There are many other ways to set money aside for your child — like 529 plans or brokerage accounts — which have tax advantages or give you substantial control over how the money is invested.
‘Guaranteed issue life insurance is good because it’s easy’
Some people purchase life insurance when they’re in their 20s and 30s, when they can garner the best rates. But what if you’ve waited to buy a policy and are now worried that age and/or poor health will prevent you from getting insurance? You may be tempted by the convenience of life insurance that doesn’t require a medical exam, such as guaranteed issue or simplified issue life insurance.
Consider these policies as a last resort. They’re very expensive relative to the coverage you receive, and the maximum benefit is usually about $50,000. For example, a 50-year-old woman could buy $50,000 worth of guaranteed acceptance life insurance through MetLife for a little over $200 per month, but for the same amount, she could buy $1.9 million worth of term coverage, according to NerdWallet research.
An “underwritten” policy that requires medical questions and a life insurance medical exam could yield better rates even if you have some medical issues. Or, if your condition is temporary, you can wait to apply when you can show your treatment has been successful, such as that for cancer.
‘Mortgage life insurance is a good way to cover a mortgage’
Your home is a huge investment, and your mortgage payments should be protected with life insurance. Including your mortgage balance when calculating the coverage amount you need should do the trick. Unless health problems make it impossible to qualify for a standard life insurance policy, there’s no need to buy mortgage life insurance, which has drawbacks, including high costs for a benefit amount that is always declining.
The bottom line
A 10-, 20- or 30-year term life insurance policy provides all the coverage most people need. As long as your term covers your working years, the time needed to pay off your debts, and your children’s years to adulthood, you should be good to go.
[Life insurance quotes are available through NerdWallet’s Life Insurance Comparison Tool.]
A good insurance agent can help you pinpoint the appropriate coverage level and policy type. A bad agent will distract you with policies that don’t give you the most bang for your buck. If there’s no compelling reason to buy the policy, turn it down.
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