News and Commentary

7 Critical Considerations When Buying Life Insurance By Scott Montgomery, CLU, ChFC

Life insurance is a vital estate planning tool intended to protect your family members from significant financial burdens and other economic risks that can occur when you pass away. However, no two policies are alike and navigating the world of life insurance can be quite complex.

In the simplest terms, a life insurance policy is a legal contract that requires you to make regular premium payments to an insurance company during your lifetime. In exchange, the insurer pays your named beneficiaries a tax-free lump sum death benefit when they pass away. Because the death benefit passes outside of probate, your beneficiaries receive immediate funds to pay required bills and the security to maintain their way of life long after you are gone.

When evaluating life insurance policies, several factors should be considered under the guidance of experienced financial advisors to help ensure the policy you select fits your unique needs and goals. Following are seven things to keep in mind as you assess all the options available to you.

Understand the differences in policies and the benefits they provide.

At the most basic level, there are two types of life insurance. A term policy protects you for a set period, whereas a permanent or whole life insurance policy provides coverage throughout your lifetime. For purposes of comparison, term insurance is akin to renting a house, whereas permanent insurance is analogous to home ownership.

Because term life insurance covers a limited period, its premiums are less expensive than a permanent insurance policy. However, permanent life insurance includes the added benefit of an investment component with a cash value of tax-free earnings that you can tap into while you are alive without incurring any tax consequences. Moreover, you may choose to surrender a permanent life insurance policy and use the cash value to pay your premiums. Utilizing or accessing the cash value in any way can directly impact the death benefit or have tax implications.

Start young to keep your policy premiums low.

Health issues that arise as you age may require higher policy premiums or disqualify you from coverage entirely. If you are married, have a child, or are financially responsible for another person, you should consider life insurance to replace any income that will be lost should you pass away unexpectedly.

Be honest when applying for coverage.

Lying on a life insurance policy application can affect your ability to get coverage, increase your premiums, and even cancel a policy already in place without returning the premiums you may have already paid.

Consider whether the death benefit is enough to protect your beneficiaries fully.

The amount of coverage you need will depend on a long list of factors, including, but not limited to, your salary, your spouse’s employment and earning power, your debt (i.e., mortgage and credit card bills), your children’s ages and your wishes for them to attend college or purchase a car or home of their own in the future. At a minimum, the death benefit should replace your salary and cover your outstanding debt. However, it behooves you to also account for inflation and your family members’ unique needs in the future.

Don’t keep it a secret.

Once you secure a life insurance policy, share the policy information with your beneficiaries or someone else you trust. They can notify the insurance company and begin processing the death benefit when you pass away.

Pay policy premiums on time.

With a term policy, missing just one premium payment can result in policy termination and forfeiture of all the premiums you paid up to that point. Alternatively, a permanent policy with sufficient cash value may continue if you miss a premium payment. However, repeated missed premiums or insufficient cash value will result in a lapse of a permanent life insurance policy.   Consider setting up an automatic payment program through your bank account to avoid this costly scenario.

Review your policy annually to ensure it continues to meet your goals.

Your insurance needs will change as you experience different life events, including marriage, the birth of a child, a divorce or the death of a spouse. Therefore, it is crucial to annually review your policy and the persons you name to receive the death benefit, especially since those designations supersede any instructions in your will.

About the Author: Scott Montgomery is a director and financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Ft. Lauderdale, Fla. office at (954) 712-8888 or

Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, Fla. 33301 (954) 712-8888.

Scott Montgomery is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.

This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove correct.

Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.

Insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased.  As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company.

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Updated on July 22, 2024