Short Buying Guide For Life Insurance

One reason most people buy life insurance is to replace income that would be lost with the death of a wage earner. The cash provided by life insurance also can help ensure that your dependents are not burdened with significant debt when you die. Life insurance proceeds could mean your dependents won’t have to sell assets to pay outstanding bills or taxes. An important feature of life insurance is that there is no federal income tax on proceeds paid to beneficiaries.

How much life insurance do I need?

First, assemble personal financial information and review your family’s needs. Then, consider these factors:

• Any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes
• funds for a readjustment period, to finance a move or to provide time for family members to find a job
• ongoing financial needs, such as monthly bills and expenses, day-care costs, college tuition or retirement

One rule of thumb is to buy life insurance that is equal to five to seven times your annual gross income.

What type of insurance do I need?

Term insurance:

Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. The policy may cover a fixed period of time with a fixed premium, or over time, the premium will increase with the policy’s value unchanging, or the policy’s value will decrease and the premium remain unchanged. It is important to remember that most term policies have no cash surrender value, which means premiums are usually lower than any of the permanent insurance types.

Permanent insurance (whole or ordinary life, universal or adjustable life, variable life)

Permanent insurance provides lifelong protection and is known by the names described above. As long as you pay the necessary premiums, the death benefit always will be there. 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 long term, it could be the wrong type of insurance for you. Most permanent policies have a "cash surrender value." This means:

You can cancel or "surrender" the policy and receive the cash value as a lump sum of money. Generally, the longer a policy is kept, the more cash value it will have.

If you need to stop paying premiums, you can use the cash value to continue your current insurance protection.

Usually, you may borrow from the insurance company, using the cash value in your life insurance as collateral. These loans are not dependent on credit checks or other restrictions, except for repayment (or your beneficiaries will receive a reduced death benefit).

Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount.

Whole Life or Ordinary Life:

This is the most common type of permanent insurance. The premiums must be paid periodically in the amount indicated in the policy. These premium amounts generally remain constant over the life of the policy.

Universal Life or Adjustable Life:

After your initial payment, you may pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy.

Advantages and disadvantages

Term Insurance:

Advantages Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest. It’s good for covering specific needs that will disappear in time, such as mortgages or car loans.

Disadvantages Premiums increase as you grow older (or coverage per dollar will decrease). Coverage may terminate at the end of the term or may become too expensive to continue. Generally, the policy doesn’t offer cash value or paid-up insurance.

Permanent Insurance:

Advantages As long as the necessary premiums are paid, protection is guaranteed for your entire life. Premium costs can be fixed or flexible to meet financial needs. Policy accumulates a cash value that you can borrow against. The policy’s cash value can be cashed in or converted. A provision or "rider" can be added that gives the option to purchase additional coverage without taking a medical exam or to furnish evidence of insurability.

Disadvantages 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.

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