How to Choose Life Insurance
GETTING STARTED
The first step in purchasing life insurance is deciding whether you will purchase the insurance yourself or use the advice and help of a life insurance professional. If you decide to purchase the insurance yourself, you can do so through a variety of Internet providers. You should also consult with either your attorney or accountant regarding the ownership structure and what type of insurance to purchase.If you decide to purchase life insurance with an insurance professional, he or she will help you decide on the type of insurance, the appropriate ownership of the insurance, how much insurance to purchase and how to structure the policy to provide you the benefit you want and need. The product is complicated and you should strongly consider working with a professional. Those who don't work with life insurance on a regular basis will often make mistakes that a seasoned and honest insurance professional won't.
STEP 1. Choose a life insurance professional.
If you decide to use a life insurance professional, choosing the correct one is the most important step in helping you achieve your life insurance goals. You should consider a life insurance agent with the following criteria:- Extensive experience in the life insurance business (at least five years).
- A positive reputation in the community.
- A designation such that shows competence with life insurance such as CLU (Charted Life Insurance Underwriter) ChFC (Chartered Financial Consultant), CFP® (Certified Financial Planner).
- Extensive experience working with private business owners in solving risk management, asset protection and wealth transfer engagements.
- An ability to understand your goals and provide solutions that don't always include life insurance (for example, using a "529 college plan" to finance a college education instead of using a cash value life insurance product).
Home Business Insurance
For more on types of insurance available, see the Inc.com guide, How to Choose Business Insurance.
STEP 2. Develop clarity about what you want the insurance to do.
Once you understand what the insurance will do, you and your advisor can decide who should own the insurance and how the insurance premiums should be paid.Common uses and ownership of insurance are as follows: Use: Death benefit funds business continuation. (Key man insurance) Owner: Business
Use: Proceeds used to purchase your business share from your surviving family members. (Buy/sell insurance) Owner: Business or Business Partners
Use: Proceeds provide living income for surviving family members. (Family risk insurance) Owner: Trust outside the business or spouse
Use: Supplemental retirement savings Owner: Trust outside the business policy holder, or spouse
Use: Estate tax funding. (Wealth transfer insurance) Owner: Life insurance trust
Understanding the use will help you decide which type of insurance to choose.
STEP 3. Understand the types of life insurance available.
Life insurance is broken into two broad categories -- term insurance and permanent insurance -- and several subcategories.Term Insurance
Term insurance is typically purchased for a particular time frame. (5, 10, 15, 20 or 30 years) and pays a benefit only if you die in the insured term. (If you don't die during the insured term there is no return on the policy.)Permanent Insurance
Permanent insurance is designed to be used in both life and death. Permanent insurance has two components: death benefits and cash value. A death benefit is the money that is paid when you die -- for survivors' living expenses, funds to keep the business going or providing liquidity to pay estate taxes that may be due. Cash value is the amount of money the policy is worth during your lifetime if you decide to either end the policy or borrow money from the policy. This can provide supplemental savings for activities such as purchasing a house or retirement income.Permanent insurance has several subcategories:
- Whole life insurance. This contract pays a dividend from the issuing company and cash values grow as dividends are declared by the issuing company. Dividends come from profits of the company as well as investment returns on invested premium dollars the company earns.
- Universal life insurance. This contract allows flexible premium payments and has a term insurance component as well as a cash account component. The term insurance costs are deducted monthly to provide the life insurance and the excess cash in the policy is credited with interest from the insurance company. The excess cash typically earns an interest rate that is very close to what can be earned in a bond account.
- Variable universal life insurance. This contract is the same as universal life with the exception that there are several sub-accounts the owner of the insurance policy can choose. Typically the sub-accounts will have stock as well as bond accounts within the policy. The owner of the policy will choose the asset allocation and take the risks of whether the market increases or decreases the cash in the policy. This policy is typically used for those who are looking for supplemental retirement income.
Insurance is a complicated product that provides a variety of uses for owners and beneficiaries. Obtaining clarity of the purpose of the insurance is the most important step in deciding what type and how much insurance is needed. If you are purchasing insurance for business continuation, you want enough death benefit to insure the company continues to operate. If you are purchasing insurance for family protection, you want enough insurance to provide cash for your family.
Determining the amount and type of insurance is often a primary activity of a life insurance professional, your accountant or your attorney.
Life insurance should be purchased as part of an integrated financial plan. When insurance is purchased in this manner, it provides significant benefits for the owners, the business and the family.
Questions to Ask
- Will you purchase life insurance over the Internet or use a life insurance professional?
- What are your goals for purchasing life insurance?
- What do you want the insurance to do (fund business continuation, purchase business from family members, provide income for survivors, etc.)?
- Are you interested in term insurance or permanent insurance?
- What is the amount of insurance you should purchase?
Related Links
Passing It OnTwo Partners, One Life Insurance Policy
When It Comes to Risk, Be Realistic
Recommended Links
Financial Planning AssociationThe trade association that represents financial planners.
Life and Health Insurance Foundation for Education
Includes a small-business planning section.
National Association of Insurance Commissioners
The association for state insurance commissioners. There is a link on the front page to bring you to your own individual state for more information.
National Association of Insurance and Financial Advisors
The largest of the trade associations that represent life insurance agents.
