Prev1 of 2Next
Alamy Life insurance plays a valuable role in helping protect families from the financial impacts of an unexpected tragedy. For one billionaire, that was so attractive that it led to the biggest life insurance policy ever written. According to a CNBC report, an unnamed Silicon Valley tech tycoon bought the record-setting policy with a death benefit of $201 million, which required 19 insurance companies to participate in order to spread the risk.
You face some of the same financial risks — albeit on a smaller scale — that inspired this single entrepreneur to buy that policy. Here are four tips to make sure you choose the right life-insurance protection.
Consider the Long Run In Choosing Policy Size
Life insurance isn’t just something you buy for today. Typically, the needs that prompt you to buy a life insurance policy now, such as the birth of a child or taking on a big financial obligation like a mortgage, will last for decades. What seems like a huge policy amount today might not look nearly as big after considering the impact of inflation over that time. When you choose a policy, consider the rising needs for your family, and also inquire about potentially adding coverage down the road without having to cancel your existing policy.
Make Sure You Pick a Healthy Insurer
Many people simply look for the lowest premiums. But choosing a life insurance company that doesn’t have the financial strength to back up its policy obligations could leave you or your loved ones unable to collect on the benefits when they need them the most. Although most states have guaranty associations that will give you a measure of protection if your insurance company goes insolvent, there are usually caps, with a typical maximum of $300,000 for life insurance death benefits. That’s another reason why the tech tycoon’s coverage comes from many companies.
One way to assess the strength of your insurance company is to look at third-party ratings. For instance, A.M. Best rates financial strength, with A++ and A+ indicating superior ability to meet insurance obligations and A and A- showing excellent capacity to pay claims. Grades further down the scale indicate rising uncertainty about a company’s prospects. The peace of mind of not having to worry about your insurer’s solvency can be worth the extra cost.
Be Wary of Insurance-Based Investment Products
Many insurance professionals will recommend more comprehensive life insurance products that include an investment element. Although these products aren’t universally bad, they often come at an added cost, and they’re almost always more complicated than similar non-insurance-based investments.
It’s typically much easier for you to take whatever extra amount you would have spent on a whole or universal life policy and simply invest it in ordinary investment vehicles. Even if some of the unique features of insurance-based investments appeal to you, make sure you understand them completely before you commit to buying.
How You Own a Life Insurance Policy Matters — Especially If It’s Big
Most people own life insurance policies in their own name. But if your policy is big enough to have implications for estate planning, then alternatives can be a smarter move.
In particular, if you own a policy in your own name, then the death benefits your policy pays out will be included in your estate, subjecting that money to estate taxes of as much as 40 percent. One way to avoid that result is to create a life insurance trust to own your policy, thereby removing death benefit proceeds from your estate and delivering the full benefit amount to your policy beneficiaries. Creating a trust typically involves the added expense of a lawyer, but long-run savings can be worth the effort.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.