Short Buying Guide For Life Insurance
The best way to make an informed decision about buying life
insurance is to become familiar with the basics.
Why do I need 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 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
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
Advantages and disadvantages
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.
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
As long as the necessary premiums are paid, protection is guaranteed for your
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.
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