Evaluating Life Insurance Policies

Life insurance can be vital to protecting your family’s financial future and can also help you manage some immediate expenses. The most common goal for life insurance is to provide income replacement for a surviving spouse and dependents.

However, life insurance can also be earmarked for paying estate tax settlement costs, shifting wealth to the next generation, or benefiting favored charities. Whatever the ultimate purpose, life insurance can be a complex product. To get the best coverage, shop around and compare company quality, coverage and costs.

Finding a reputable company 
A life insurance policy is only as good as the company behind it. That makes selecting the right company at least as important as choosing the right policy. Rating agencies, such as A.M. Best and Moody’s Investors Service, grade companies based on their financial stability, the timeliness with which claims are paid, and the quality of customer service.

Choosing term insurance or permanent coverage 
Life insurance policies generally fall into one of two broad categories: term insurance and permanent coverage. With term insurance, if the insured dies during the policy’s term, the beneficiary receives the policy proceeds.

No benefits are paid if the insured lives beyond the term of the policy, and there is no investment or cash value feature. Term policies from different companies can be compared relatively easily, since there are few variables from policy to policy. Term insurance is significantly less expensive than permanent coverage.

Permanent insurance, often referred to as whole life, covers you for your entire life. This type of insurance offers a set death benefit for a specific premium, but the policy doesn’t have an ending date.
You continue to pay the premium for the rest of your life, unless you decide to cash in the policy and receive, as a lump sum, the policy’s accumulated cash value. Basic types of permanent insurance policies include variable life and universal life, in addition to whole life.

Unlike term policies, whole life policies differ in substantial ways, including surrender charges, cash value projections, terms for borrowing against the policy’s cash value, and dividends paid by the company. Take these factors into account when comparing policies.

Selecting the level of coverage 
It’s difficult to apply a rule of thumb for determining how much life insurance you should buy. The level of protection you need depends on factors such as your age, total assets, health, sources of income, number of dependents, the extent of debt, and your lifestyle.

If you have no dependents, or if you don’t generate a significant percentage of your family’s income, you may not need life insurance at all.

On the other hand, if your salary is critical to supporting your family, paying the mortgage, and sending your children to college, life insurance can help meet these financial obligations should you die prematurely.

Shopping for the best-priced policy 
If you are interested in permanent life insurance, it’s generally a good idea to confer with your CPA and a life insurance agent. Independent agents work with many insurers and often find the best policy at the best price. If there is a particular insurer you have in mind, you can work with an exclusive agent who sells policies for just that company. In some cases, you can purchase a policy directly from the insurance carrier.

Remember that once you contract for a policy, there is typically a review period during which you can cancel coverage if you change your mind.

Reviewed and edited by C. William Thomas, J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University.

Copyright 2006, The American Institute of Certified Public Accountants