What You Should Know About Life Insurance

Why do I need life insurance?
Where do I begin?
How much life insurance will I need to purchase?
What are the different types of insurance?
What is term insurance?
What is permanent insurance?
What are the types of permanent insurance?
What are advantages/disadvantages of term insurance?
What are advantages/disadvantages of permanent insurance?
Where do to I purchase life insurance?
Tips on purchasing life insurance?
 

     Life insurance is the foundation of financial security for you and your family.  It protects your financial resources against the uncertainties of life so you can plan for the future.

     Choosing a life insurance product is an important decision, but it can be a complicated.  As with any major purchase, it is important that you understand your needs and the options available to you.

     Why do I need life insurance?  Life insurance provides cash to your family after you die.  The money your depends receive (the death benefit) can be an important financial resource - to help pay the mortgage, run the household, and ensure that your dependents aren't burdened with debt.  Having a life insurance policy might mean your family won't have to sell assets to pay outstanding bills or taxes.  What's more, there is no federal income tax on life insurance benefits.  If protection is not your primary goal, you should consider other financial products.

 

     Where do I begin?  Start by evaluating your family's needs.  Gather all your personal financial information and estimate what your family will need after you're gone.  Include ongoing expenses (day care, tuition, or retirement) and immediate expenses (medical bills, burial costs, and estate taxes).  Your family also may need money to help them readjust...perhaps to pay for a move, or job hunting expenses.  Remember, life insurance provides financial protection.

 

     How much life insurance will I need to purchase?  While there is no substitute for evaluating needs, one rule of thumb is to buy life insurance equal to ten times your annual income.

 

     What are the different types of insurance?  Life insurance generally falls into two categories: term insurance and permanent insurance.

    

     What is term insurance?  Term insurance provides protection for a specific period of time, from one to 30 years.  It pays a benefit only if you die during the term.  Depending on the policy, the premium may remain constant during its term or increase each year.  Some term insurance policies can be renewed when you reach the end of the term, but the premium rates will generally increase.  Many policies require that you present evidence of insurability at renewal to qualify for the lowest rates.

 

     What is permanent insurance?  Permanent insurance provides lifelong protection.  As long as you pay the premiums, the policy will remain in force, and the death benefit will be paid.  These policies are designed and priced for you to keep over a long period of time.  If you don't intend to keep the policy for the term, this may be the wrong type of insurance for you.

 

     What are the types of permanent insurance? 

Whole Life or Ordinary Life is the most common type of permanent insurance.  The premiums generally remain constant over the life of the policy and must be paid periodically in the amount indicated in the policy.  The cash value grows based on a fixed interest rate set in the policy.

Universal Life or Adjustable Life allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums.  You also can reduce or increase the death benefit more easily than under a traditional whole life policy.  (To increase your death benefit, the insurance company usually requires you to furnish satisfactory evidence of your continued good health.)

Variable Life provides death benefits and cash values that vary with the performance of a portfolio of investments.  You can allocate your premiums among a variety of investments offering different degrees of risk and reward-stocks, bonds, combinations of both, or accounts that guarantee interest and principal.  You will receive a prospectus in conjunction with the sale of this product.

What are the advantages and disadvantages of term and permanent insurance?

Advantages of Term Insurance

• Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age.
• It covers needs that will disappear in time, such as mortgages or college expenses.

Disadvantages of Term Insurance

• Premiums increase as you grow older.
• Coverage may terminate at the end of the term or become too expensive to continue because of age or health status.
• The policy doesn't offer cash value.

Advantages of Permanent Insurance

• As long as the premiums are paid, protection is guaranteed for life.
• Premium costs can be fixed or flexible to meet personal financial needs
• The policy accumulates a cash value against which you can borrow. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.)  You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance.
• The policy's cash value can be surrendered - in total or in part - for cash or converted to an annuity, (an insurance product that provides an income for a person's lifetime or a specific period of time.)
• A provisions or "rider" can be added to a policy to give you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability.  Other riders waive the premium if you become disabled, or allow you to collect all or part of the death benefit if you become terminally or chronically ill.

Disadvantages of Permanent Insurance

• Required premium levels may make it hard to buy enough protection.
• It may be more costly than term insurance if you don't keep it long enough.

     After you have considered your financial needs and become familiar with the basic types of life insurance, it's time to choose a company and agent.

     Where do I purchase life insurance?  You can purchase life insurance at an insurance agency, a brokerage firm, a bank, or directly from a life insurance company on the Internet.  Most companies have websites describing their products and services, and some can direct you to an agent in your area.

Tips on Purchasing Life Insurance

• Take your time.  On the other hand, don't put off an important decision that would provide protection for your family.
• Make sure you fully understand the policy and are comfortable with the company, agent, and product.
• When you purchase a policy, make your check payable to the insurance company -- not to the agent.  Get a receipt.
• After you have purchased a policy, you may have a short "free-look" period --usually 10 days after receipt -- during which you can cancel.  Read your policy carefully.  If you decide not to keep it, the company will give you an appropriate refund.
• Review the application information in your policy.  Notify your agent or company promptly if there are any errors or omissions.
• If an agent or company contacts you and wants you to cancel your policy and buy a new one, contact your original agent or company.  Surrendering your policy to buy another could be very costly; however, there are times that a switch to a new policy is appropriate.