Everything You Wanted to Know About Life Insurance But Were Afraid to Ask
What Is Life Insurance?
Life insurance is a written contract between the insurance company and the insured (policy owner). The insurance company agrees to pay a specified amount of money upon the insured's death. Some policies will also pay a specified benefit in instances of critical illness or terminal illness. During the lifetime of the policy, a premium payment (s) is made by the insured to the insurance company to maintain coverage.
Why Should I Have Life Insurance?
There are many reasons to have life insurance, but perhaps the three most common reasons are to replace lost income of the insured, pay off a mortgage and pay other bills such as funeral expenses or medical expenses. The funds that your beneficiary receives are usually tax-free and are a very important financial resource. In fact, the tax-free benefit may keep children and spouses from having to liquidate assets at below-market value dollars.
What Are The Different Types Of Life Insurance?
There are four major forms of life insurance:
Term insurance, which is the simplest and most inexpensive type of coverage, is purchased for a specific period of time. There is no cash value or investment feature. When the policy terminates, you will be required to medically re-qualify to secure the best rates.
Whole Life insurance has level premiums with both an insurance and investment component. This type of policy accumulates cash value each year which can be used in a variety of ways, such as reducing the premium, increasing the death benefit or withdrawing or borrowing the funds, subject to policy rules and limitations.
Universal Life Insurance, like Whole Life insurance, includes an investment component. It combines a term life insurance policy with a tax-deferred interest investment account. Premiums and cash value accumulation is usually lower than a Whole Life policy. However, there is added flexibility regarding altering premium payments and the face amount of coverage.
Variable Life Insurance is a permanent life insurance policy with various investment options. Most Variable policies offer numerous "sub-accounts" to the policy owner. The "sub-accounts" consist of many diversifies types of investments including fixed and variable funds. Cash value, like other policies accumulates on a tax-deferred basis.
What Are The Different Types Of Term Insurance?
There are three main types of term insurance.
Renewable term insurance continues in-force for a specified time period...usually in 1, 5 or 10 year increments. After each period of coverage, the policy renews without the insured having to prove insurability. Premiums increase with each renewal, so the longer coverage is in effect, the higher premiums will become.
Level term insurance is perhaps the most popular type of term insurance. This type of policy provides a fixed amount of coverage over a pre-specified period of time. The most common level term policies provide coverage for 5, 10, 15 or 20 years. Premiums can also be guaranteed not to increase for the duration of the contract.
Decreasing term insurance is most often used to provide mortgage protection. Premiums remain fairly level but the death benefit gradually reduces. Once popular, this type of coverage is rarely used since "guaranteed level term" insurance is generally a much more affordable option.
How Much Coverage Should I Have?
While it may be impossible to replace the lost income of an insured, an ample amount of life insurance will certainly make a big difference, and provide badly-needed income when finances are strained. A simple method is to calculate 10-12 times your adjusted gross income for a quick calculation. Of course, affordability must also be considered in determining how much life insurance to purchase.
How Do I Know Which Company To Choose?
The most important factor to consider is the "rating" of the company. Only companies rated "A" by A.M. Best Company should be considered. Any other company may not be as financially stable as the "A" rated companies. There are various other financial ratings available such as "Standard & Poor's" and "Weiss." A local experienced insurance broker will be able to research this information for you.
Should My Spouse Have Life Insurance?
If both spouses are working outside of the home, then insurance should be strongly considered since it is important to protect the earning capacity of each spouse. Naturally, the amount of income will help determine the amount of insurance needed. If one spouse is not a wage-earner, the needed amount of coverage will be reduced, but still necessary because of other expenses.