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Life Insurance

In order to make the right choice when buying life insurance, you need to understand some of the basics. There are many companies selling insurance, and sometimes making the best choice can be difficult. To start the process, you need to think about the answer to this question: Why do I need life insurance?

Why Life Insurance?

When purchasing an insurance policy, you want to balance fulfilling your financial needs with cost. That balance boils down to the amount of insurance coverage you need versus how much you can afford to spend on the policy. You must pick the type of policy that meets your coverage goals as well as your financial budget.

Additional Resources

Let's step back and revisit the question we asked ourselves earlier. Why do I need life insurance? The answer to this question will help you decide which route to take, and how much to spend.

There are many good reasons for buying life insurance, some of which include:

Providing for the financial security of your family in the event of personal loss or injury.
Providing funds to pay for the deceased person's funeral.
Insuring against a particular need. For example paying off a loan such as a home mortgage or college loan.
Providing funds to pay income taxes or other final obligations due on an estate.
Compensation to a company in the event of a loss of a key employee, or to provide funds to purchase the remaining share of a business from a partner.

Once you know the reasons you are seeking life insurance, then it should be easier to figure out just how much insurance you'll need. Basically, you need to purchase a policy that is just large enough to meet the needs you identified earlier. To be over insured is just as bad as being underinsured since excessive payments on insurance policy premiums can take money away from your other long range financial savings goals. You need to strike a balance between financial responsibilities and your comfort for risk.

Choosing Between Life Insurance Plans

There are two basic types of life insurance policies: term insurance and cash value policies. Within these two types of insurance there are endless variations, but let's start with some simple definitions:

Term Life Insurance - This type of policy provides life insurance for a specific period of time. It provides for financial benefit in the event of death, but it has no cash value. If your budget is already tight, then you should be able to get more dollar coverage by buying term insurance versus a cash value policy. With term insurance policies, the insurance premiums will increase as you get older but cannot exceed the guaranteed maximums stated on the policy.
Cash Value Insurance - This type of life insurance combines a loss benefit with a cash accumulation feature. When you purchase a cash value insurance policy, you will pay more in early years when compared to term insurance. The dollars you pay that exceed the cost of the loss benefit are put in an interest-bearing fund. At a future date, if you decide to terminate the policy, then cash accumulated in this fund will be returned to you.

In the next several sections we're going to discuss the specific types of insurance policies on the market today, and how they're bundled, or sold, by insurance agents. We'll also briefly discuss some of the more interesting features of each plan.

Term Life Insurance Policies

Term life insurance is an affordable way to provide financial security for loved ones. By nature, term life insurance is usually guaranteed for "terms" or intervals such as 10, 20 or 30 years. Term insurance is designed to provide for a one-time benefit. Moreover, unlike whole life and universal life policies (discussed later), term insurance does not have a cash value.

The one true risk that term insurance carries with it is the fact that you might be uninsurable when the term coverage finally expires, leaving you without life insurance. This can happen due to the onset of an illness or a medical condition that developed as you age. One way around this is to purchase one-year renewable term policies, where the premium escalates each year, as the policyholder grows older.

Universal Life Insurance Policies

Universal life insurance, which is also sold as group universal life or group variable life insurance, is a policy that allows you to change the amount of insurance coverage as your need for insurance changes. Universal life insurance plans offer benefits beyond those of term life insurance, including a tax deferred cash balance.

With a tax deferred cash balance you can use the money in the account to continue coverage, elect to own paid-up coverage, or establish an annuity. You always have the option of claiming the surrender value of the account.

Whole Life Insurance Policies

With a whole life insurance policy, you're combining the benefits of a term policy with that of an investment. That means a whole life policy has two components to it, an insurance component, and an investment component that has a cash value.

During the early years of a whole life policy, a smaller portion of the premium will go towards the cost of providing life insurance. As you grow older, the cost to provide insurance will rise, and a larger portion of the total premium will go towards funding life insurance.

In addition to providing the policyholder with a cash value, certain whole life plans also provide for dividends. Dividends are paid when the actual cost to provide insurance turns out to be less than the insurance company assumed in their original forecast.

Because of the way that the insurance premiums are calculated with whole life insurance, the policy is considered permanent life insurance. A permanent life insurance policy is one that will continue to provide for insurance coverage as long as you continue to make your annual premium payments.

Selecting the Right Life Insurance Policy

If you're not exactly sure which type of insurance policy is right for you, we have a life insurance selector that can help. By asking you a series of questions concerning your financial health and strategy, the selector can help make a recommendation on the type of life insurance that best suits your needs.

How Much Life Insurance

We've also developed several tools that can help you figure out how much life insurance you might need. Running through this type of exercise before talking with an insurance agent can help give you a more comfortable feel for the amount of insurance they might recommend.

Our selection of life insurance calculators include:

Simple Life Insurance Calculator - takes a very simple approach to figuring out "roughly" how much life insurance you need.
Income Based Life Insurance Calculator - this tool uses the value of any existing life insurance policy, and measures it against your current income needs.
Comprehensive Life Insurance Calculator - our most complex aid of this type, this calculator evaluates over 25 variables to determine just how much life insurance you might need to buy.

Buying Life Insurance

There are four ways you can purchase life insurance: through an agent, through the mail, over the internet, or through a group. Most people purchase their insurance through an agent, but you need to be careful if you go this route.

Insurance agents earn commissions on your policy; that is how they make a living. Make sure you know what you need before talking to an agent or you will likely sign a policy that results in an over-insured situation. A good agent will walk you through the process of figuring out how much insurance you need, and will not rush you to sign a policy.

The second most popular means of purchasing life insurance is through your employer. Many employers offer life insurance through a group plan that can be less expensive than an individually purchased policy.

Your best defense against making a bad decision when you are purchasing a life insurance policy is knowledge. The more you educate yourself on the subject, the better equipped you will be to make the right decision. If you intend to replace or change existing coverage, then be sure that the agent makes a purchase recommendation based on a sound needs analysis.

Replacing Existing Insurance Policies

Finally, insurance agents have a duty to ask about your current life insurance coverage. There are rules and regulations in place that are designed to protect you and every agent should follow those guidelines once it is known that you have an existing policy.
For example, you should never cancel an existing life insurance policy before your new policy is in effect. There may also be "contestable periods" where your new policy may not automatically pay a claim. Agents need to explain these and all other risks involved with replacing an existing insurance policy. As a consumer, you may be required to acknowledge you understand these risks in writing.

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