Life Insurance and the Young Professional: Choosing a Plan

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This column is the second and final part of my series on life insurance for young professionals. Part one considered whether you, as a young professional, should purchase a life insurance plan. 
 
Life insurance doesn’t have to be purchased from your local agent anymore. Plenty of online sources exist to assist you in getting a policy in place. But a planning professional can help you determine the face amount and type of policy you need. The agent should be appointed with multiple companies so he or she can shop for the best premium. The process is relatively simple for most YPs. The first step is to determine the amount of life insurance you need, which is called the face value of the policy. (My last post discussed how to obtain this information.) The second step is to determine which type of policy fits your needs and budget. Third, an agent will shop multiple companies to find one that is financially stable and has a premium within current market prices.
 
The final step, if required, will be a short medial exam from a nurse contracted by the company you are buying the insurance from. Generally, the nurse will observe you to make sure you look healthy and will draw blood for analysis. At this point, your medial records will be reviewed by the insurance company for an accurate rating of your health. Lifestyle choices such as scuba diving, flying your own plane and general risky behavior are disclosed on the application. These criteria will ultimately determine the dollar amount of your premiums.
 
Many types of life insurance policies exist and are categorized as either permanent or term policies. The most popular are universal, variable and whole life insurance on the permanent side, and term life insurance on the term policy side. Let's consider whole life insurance and term life insurance. Whole policies are permanent in that they will cover the insured for life or to age 100, whichever comes first. They usually have some sort of cash value that is built up over time, and are generally more expensive per $1,000 of coverage. Term insurance covers the insured for a specific period of 5, 10, 15 or 20 years. The term can by anything from a year to 50 years, but 5 to 20 are the most common. (A five-year policy might be considered if one was to accept a temporary position overseas in a high risk locale such as Iraq.) At the end of the term, the coverage ends and a new policy has to be issued. Term insurance has no cash value and is the cheapest coverage you can buy per $1,000. Of course, with either type of insurance your coverage will cease if you stop making your premium payments.
 
Term insurance is a good choice if you want to be covered from the time children are born until their college graduation, for example. Once your dependents become independents the critical time for needing life insurance has passed for most people. Whole life is for someone who wants to have a policy in place for life, and likes the fact that they can use the cash value in retirement. Both types of policies will have premium payments that are constant for the life of the policy so buying the insurance when you are younger will most likely be less costly.
 
AM Best, Moody’s and Standard and Poor’s all publish ratings based on the ability of an insurance company to pay claims. The ratings companies vary in their use of letter grades. Insurance companies with a minimum of an “A” rating from AM Best and S&P are generally acceptable. John Hancock, MetLife, State Farm, Mutual of Omaha and Pacific Life all fall within this standard, and there are many more. Please visit this link for more info on insurance company ratings.
 
Read more from financial columnist Nick Wychocki on the ABC's of money management.
 
(Photo credit: dunxs1; C.C. 2.0)
 
Nick Wychocki works for Global Wealth Consultants, a registered investment advisory firm, as their Senior Wealth Strategist. He has worked there for six years in beautiful Naples, Fl., after having cut his teeth in the currency options pits of the Chicago Mercantile Exchange. He is a CFP certificant and a graduate of the University of Florida’s MBA program. Have a question for Nick? Leave a comment!