Life Insurance Primer
Know the basics before purchasing a life insurance policy. It could
save you from purchasing too much or the wrong kind of life
insurance. Know what you need – and don’t need – is important in
providing for your family before and after you pass.
The first step in purchasing a life insurance policy is analyzing
your needs. Consider what your family would need financial when you
pass and what you can afford while you are still alive. Take into
consideration the standard of living your dependants will maintain
and if you will be leaving behind any expenses such as medical bills
and funeral costs? Also think about long term planning such as
children's expenses and college education funds, income for the
surviving spouse, mortgage and other debts.
As you and your family grow older, your life insurance needs will
change, so be sure to evaluate your life insurance policy
periodically. Many insurance agents will recommend a review about
once every five years or any time you experience a life changing
event such as a change in income or assets, marriage, divorce, the
birth or adoption of a child, or a major purchase such as a house or
business. In theory, you should have a lesser need for life
insurance as you age because you will have fewer people depending on
your income for support.
Types of Life Insurance Policies
There are two main types of life insurance policies: Permanent life
insurance and term life insurance.
Permanent life insurance
A this type of policy many be right for you if you want to leave an
inheritance for a charity or dependents or if your adult children,
spouse or elderly parents rely on your income for financial support.
Term life insurance
This type of insurance is generally less expensive and less of a
commitment than permanent life insurance. Term life insurance is
only active until you decide to stop paying into it and provides
coverage for a certain period of time, such as 10, 20 or 30 years.
It is typically for people who need life insurance just long enough
to meet their fiscal responsibilities to their dependants, such as
young children. If you die during your working years, your family
will be provided for through your planned retirement year.
There are also other types of life insurance plans to choose from
including cash value life insurance, whole life, variable life, and
universal life. First, there is more to learn about term life
insurance.
Term life insurance is simplest of life insurance policies to
understand and the cheapest to purchase. It also maintains long term
rate-guarantee periods and premiums are at all-time lows. When
you buy life insurance, it
will provide death benefit protection for your family even if you
won’t be able to pass on any savings, investment or cash value
components.
Term life insurance is purchased to cover specific set periods of
time such as 10, 15, 25 or 30 years. As long as you pay your
premiums, the company cannot cancel you. There are three types of
payments you can choose from: annual renewable term life, level term
insurance or decreasing term insurance.
Annual renewable term life
Your policy will automatically renew each year and premiums increase
as you get older.
Level term insurance
Your premiums and benefits will stay the same.
Decreasing term insurance
Your premiums will remain level but your death benefit declines over
time. This is a good choice if you want to cover only a specific
debt that decreases, such as a mortgage.
It’s fairly easy to choose an initial rate-guarantee period: Figure
the period of time your dependents need your income to the available
periods you can purchase your life insurance. For instance, you may
be interested in a 30-year term life if you have young children and
decades left to pay on your mortgage. However, if your children are
grown or about to leave the home and your mortgage is paid off or
nearly paid off, look into a 10-year term life insurance policy.
Term life insurance also offers are guaranteed renewal and
guaranteed convertibility options.
Guaranteed Renewal
Talk to your agent about whether the policy contains a guaranteed
renewable option, which gives you the right to continue coverage
beyond the initial rate-guarantee period without a medical exam.
This is an extremely important feature should you become ill and
uninsurable.
Guaranteed Convertible
Many term life insurance policies offer the right to convert your
coverage to a cash value policy that the company may offer at
current rates without having to take a physical exam. This may be
useful as you age should you decide to want cash value life
insurance.
Cash value life insurance
Cash value life insurance policies, such as whole life, universal
life or variable life, offer more than just death benefits. They
offer a type of long-term savings account and a cash value
settlement for your dependants when you die. However, be prepared to
pay much higher premiums. The annual premium does not increase from
year to year in most cash value policies. Universal life policies
allow you to fluctuate your premium payments, which will adjust your
death benefit amounts.
Cash value insurance is much more complicated than term life
insurance and should be discussed with an agent in person.
Regulators insist that cash value insurance be sold using
pre-approved illustration formats. These illustrations can be to 15
pages or more. Talk to your agent about how the two major sections
cash value life insurances, guaranteed values and projected
non-guaranteed amounts, will affect you.
Be sure to pay close attention to the guaranteed death benefit and
premium payment sections as these columns contain the actual company
promises. Review these before you commit to any plan and if you are
uncomfortable with this section, don’t agree to a policy. In
addition, many cash value policies contain steep penalties for
surrendering the policies in the early years. Switching plans within
the first few years can be an expensive decision. So make sure you
are confident in your choice before going with a policy.
Whole life
Ordinary whole life insurance offers “permanent protection” with a
cash value account that grows over the years. Whole life insurance
gives you a level death benefit and level premiums throughout your
life and for as long as you pay the premiums. For instance, if you
pay $4,800 a year for the rest of your life for a $500,000 whole
life policy, when you die, your beneficiary will receive $500,000.
Whole life also contains a cash value account that increases over
time. You can withdraw your cash value or take out a loan against it
but the penalties could be steep. In addition, if you die before you
pay back the loan, the death benefit paid to your beneficiaries will
be reduced.
Make sure you talk about what your beneficiaries will receive upon
your death with your agent. If you have a traditional whole life
policy, your beneficiaries receive only the death benefit –
regardless of the amount of cash you’ve built. There are other
payout options for higher premiums including death benefit plus cash
value and death benefit plus return of premium.
The most appealing aspects of a whole life insurance policy are the
fixed premiums, the savings they can borrow against and the known
payout to their beneficiaries.
Universal life
A universal life insurance policy offers more flexibility than whole
or term life. Just make sure you understand you plan fully before
purchase.
After your initial premium payment, you can choose to change the
amount of your death benefit and you can pay premiums at any time
and in any amount. You just have to make a minimum payment and you
may have restrictions on how much additional fund you can pay in
advance. If you want to increase your death benefit, you may have to
provide medical proof that your health has not deteriorated.
New universal life insurance policies offer some of the benefits of
universal life but perform like a term life insurance policy. They
act like a term life insurance policy in that both level death
benefits and level premiums that are guaranteed for life as long as
you pay the scheduled premium.
Variable life
Variable life offers a death benefit with an additional fund that
works similar to an investment account. It shifts the uncertainties
of investment gains and losses to the policyholder.
The insurance company invests your premiums and offers you a choice
of funds to invest your money but returns are not guaranteed. The
amount your beneficiaries receive in the event of your death and the
cash value of your policy will depend on how well the accounts
perform. The cash value can theoretically go down to zero and would
then terminate your policy. However, some variable life insurance
policies will guarantee a minimum death benefit. |
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