Life insurance: choosing a policy that meets your needs

The first question you should ask yourself about life insurance is whether or not you really need it. The purpose of life insurance is to provide a source of income, in case of your death, for your spouse, children, dependents, or other beneficiaries. It can also serve other estate planning purposes, such as giving money to charity when you die, paying for estate taxes, paying for funeral and burial costs, or providing for a buy-out of a business interest.


Do I Need Life Insurance?

Whether or not you need to buy life insurance depends on whether anyone is relying on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance. (You might also need life insurance for estate planning or if you need to make arrangements for your business after you are gone.) Typically, however, if you are single with no dependents, and you don’t own your own business, you probably don’t need life insurance.


Types of Life Insurance

If you determine that you do need life insurance, how do you know what kind of policy is right for you? See our article on Life Insurance: What Types are Available for a discussion on the different kinds of policies one can buy. In general, there are two categories of life insurance:
Term, whereby you pay for coverage for a specified amount of time, and if you die during that time the insurer pays your survivors the death benefit specified;
Cash value — whole life or universal life (or variable life, or universal variable life) —, which, in addition to paying a death benefit, also provides you with some other redeemable value during your lifetime.
Using a Broker

If you know little about buying life insurance, it’s best to use a broker who deals with several companies and who can educate you about the different options available, how the cash values accumulate, and what the policy will cost you over different periods of time. The premium is based on your current age, but may increase over time.

You may also wish to consider purchasing different policies from different companies, particularly if the protection you want exceeds $500,000. Each state has a life insurance guaranty corporation, required by state law, whose purpose is to protect insureds in the event an insurer is unable to pay a claim. There are, however, limits to this protection. These limits are typically $300,000 to $500,000 per insured individual. Policies that exceed that amount are not covered.

Here are some questions to ask of your broker or agent:
How do cash values accumulate? (An early, rapid build-up is generally preferable.)
How has the policy’s cash value performed in the past? You can get this information from a publication called Best Review, Life and Health. Determine how the policy performed in comparison with the company’s projection and with other insurers.
If there are any special features in the policy, do they add value for you, or are they just bells and whistles that you’re paying for but don’t need?
What is the company’s rating with Best, Standard & Poor’s, and Moody’s? You can find these publications in public libraries or online. The rankings should be in the top three to ensure that a company has financial stability.
Note that everyone’s situation is different and your needs will not be the same as your neighbor’s even if you have similar lifestyles and family units. To choose the right policy, it is important to give your broker some important pieces of your financial information to help her understand your financial status and your current and future family needs.

What kind of exclusions and limitations might be in my health plan?

There are a variety of exclusions and limitations with respect to health insurance. Common exclusions include pre-existing conditions (subject to portability of insurance as discussed below), substance abuse, attempted suicide, mental illness, reimbursement through a Workers’ Compensation insurance program, cosmetic or elective surgery and procedures, optical and dental coverage, prescription medicine, and procedures determined to be preventive care.

Many individual health insurance policies exclude coverage for medical conditions that exist prior to the inception of the coverage. This is commonly referred to as a "pre-existing condition" exclusion. Common pre-existing condition periods are six months and 1 year prior to the inception of the insurance coverage. Other common exclusions include: psychiatric care, alcohol and drug related problems, prescription medicines, and elective or cosmetic surgery and services.

Other common limitations of coverage are listed below under Health Insurance Purchase Considerations.