Almost everyone who has bought a home or refinanced their house in the United States has received those letters saying you need to insure your mortgage in case you die. These letters are sent out by various insurance companies trying to get you to buy life insurance to pay off your house in case the worst happens. But how many people really need to purchase this kind of insurance and is it necessary? And most important, how do you know what to buy?
Many people fill out the forms attached to these mortgage insurance leads and send them back. Within a week or so an eager sales person calls you to set up an appointment for them to come to your house and talk to you about a policy that will work for you. For people that are just looking for a quote probably won’t get one over the phone. The reason is that the agents want to sit down with you and look at what policies will work for you and your situation. Also, the agent will want to fill out the paperwork and get you covered immediately.
Some things to think about when doing this are do you have life insurance already and will it cover your house. For people that currently have enough life insurance to cover their house and most of their debts usually don’t need to add on another policy payment. However, if your life insurance is through your work it is a good idea to have a private policy of your own. If you change employers or retire you may have to re-qualify or buy it at the individual price and at your current age. This can make the premium payment unaffordable. This is why it’s best to buy life insurance while you are young.
The next thing to look at is should you buy an accidental death, term or universal life policy. First, you should never buy an accidental death policy as your main coverage. The chances of an accidental death policy ever paying out are less than 1%. The window that insurance companies will payout on these policies is very narrow.
Term polices are a good way to cover your house, car or any other asset while you’re paying it off. You can buy a lot more insurance for the price compared to universal or whole life policies. The terms range in length from 5 to 30 years and can be done with or without a physical exam. Most policies cover you for that period of time and then end and you don’t get any money back. Some states have “return on premium” policies available that will return the premium payments if you outlive the policy. These policies cost more however at the end of the term you have been covered and you have a nice nest egg to invest.
Universal or whole life policies are investment policies. People can buy these policies at almost any age up to 85 years old. Normally a policy is purchased with a face amount from a few thousand dollars to hundreds of thousands or millions of dollars. The longer that you have the policy the cash value, or what you are able to withdraw from the account, will grow. Part of your premium goes to cover your insurance policy and part is invested gaining you a return on your money. If you buy one of these policies while you are young you can end up with a significant amount of cash value when you get to retirement age. If these polices are bought later in life they can be expensive however, they can also be a great way to pass on an inheritance. As you put money into the policy it should grow, as long as the market doesn’t crash every year, and when you pass away the face amount or the cash value (whichever is higher) is distributed to your beneficiaries, usually tax-free. These policies automatically cash out once the insured reaches 100 years old. Carrying a small universal life policy if bought at an early age will not only cover your loved ones if something happens to you but can also build into a significant amount of money later in life to cover larger debts and help plan for retirement.
When shopping for life insurance, be sure to spend only what you can afford. A life insurance payment should not cause you any financial stress. If you spend more than you can afford you will end up canceling the policy and it doesn’t do you any good or the insurance agent. You don’t always need to cover all of your debt. A small $25,000 policy if affordable will do more good than a $300,000 policy that gets canceled.
Honesty is also key when purchasing insurance. If you have a medical condition that you try to keep from the insurance company, they will almost always find out about it. But don’t worry; there are also policies out there that can cover people with preexisting conditions. They are more expensive but will give you some peace of mind for your family. Talk to your insurance agent about guaranteed coverage policies to find out more. If you have questions about policies, agents or companies contact your state insurance commissioner.