Life Insurance FAQ: Tips for First-Time Buyers

November 1, 2018

Making your first life insurance purchase? That could be a wise decision. No one likes thinking about death, but it’s a risk everyone must face. Granted, if you’re young and healthy, death may not be likely, but it’s still a possibility. If you do pass away, your family may be left in a difficult financial position.

Life insurance minimizes financial risk associated with death. It provides your beneficiaries with a tax-free, lump-sum distribution. They can then use those funds to overcome financial challenges such as debt, loss of income, education expenses or any other purpose.

A wide range of options are available. In fact, you may be overwhelmed by your choices. It’s difficult to know which type of policy is right for you or how much coverage you need. Below are three common questions many people have during the purchasing process. Your financial professional can also help you find the right protection for your needs.

How much protection do I need?

This question poses a major dilemma for many people. Obviously, you want enough coverage to protect your loved ones. However, you also don’t want to pay more than is necessary. How do you decide what coverage amount is right for you?

The most effective strategy is to base your coverage amount on your specific needs. For example, what financial challenges would your family face after your death? Would they struggle to replace your lost income? Would they need money to pay off the mortgage or other debts? A financial professional can help you conduct a needs-based analysis to answer these questions and others.

Which type of life insurance policy should I purchase?

Not all life insurance policies are the same. There are many different kinds, each designed to meet a variety of needs and goals. You can choose from two broad groups of policy types. The first is term insurance, which provides protection for a limited period of time, like 10 or 20 years. It’s a cost-effective tool if you need insurance while you have young children in the home or while you’re paying down a mortgage.

The other type is permanent insurance, which provides coverage for life, assuming you meet all premium requirements. In a permanent policy, a portion of your premium also goes into a cash value account that accumulates on a tax-deferred basis. You may be able to use that cash value at some point as an emergency reserve or supplemental income. There are many different types of permanent policies available.

There’s no simple answer as to which type of policy you should choose. If you’re budget-conscious, you may want to look at term policies. If you have a permanent, ongoing need for protection, a permanent policy may be a more appropriate fit. However, the only real way to answer the question is to consult with a financial professional and analyze your goals.
Whom should I name as beneficiary?

Life insurance policies are driven by beneficiary designations. On the policy application, you state who should receive your life insurance proceeds after you pass away. You can even name multiple beneficiaries, which may be appropriate if you want to split the benefit among children or some other group of people.

Think twice about leaving your life insurance to multiple beneficiaries, though. A court could appoint someone to manage the money on their behalf, and that person may not share your goals or wishes. You can avoid this risk by setting up a trust on behalf of your children. Then you name the trust as your life insurance beneficiary.

Ready to find the right coverage for your needs? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your goals and develop a plan. Let’s connect soon and start the conversation.