Life Insurance is an easy concept to understand. You buy a life insurance policy, which will give your family the money that they need to recover financially in the event that something happens to you during your years as the provider for your home. Pretty simple. Unfortunately questions like, what kind of insurance, the options available, and how much you should insure for can get a little more complicated.
* Note. There are more than 2,000 companies selling life insurance in this country. Some are very good, financially solid companies; others are not so sound. A company's financial strength is vitally important to you because, hopefully, no one is going to collect on your life insurance for a long time.
It is important to research the company that you get your life insurance through because you want them to be around for a long time. The last thing you need is to get a
life insurance policy and then just when you need it the most, find out that your insurer no longer exists.
Many Purposes for Life Insurance
Your life insurance policy can serve many different purposes. Depending on your financial situation, your policy can help with,
• Estate planning
• Accumulating cash
• Transferring wealth
• Achieving estate tax liquidity
One of the nice things about life insurance is that depending on the type of policy you get, you can pay a lot or a little, for not much difference in coverage. That being said, generally the younger and healthier you are, the less you will pay in your premium.
* Tip. So how much life insurance do you need? It depends. One common benchmark says your death benefit should be about six to eight times your annual earnings, but there are a variety of factors to consider:
• Other income sources.
• The size of your family.
• Whether your spouse works and his or her earning capacity now and in the future.
• The number of people who are financially dependent on you and for how long.
• The death benefits your family will receive from Social Security and any life insurance plan through your employer.
• And any special needs such as mortgages, college education funds and estate planning.
Make Sure Death Benefit Is Adequate
One of the first questions you will have to ask yourself is what kind of life insurance you want to buy.
There are two basic types:
1. Term Life-- This is good for only a certain period of time, and,
2. Cash-Value-- This is “permanent” insurance that also includes a buildup of value in cash in addition to your death benefit. You can borrow against your cash value. You can even take out some of that cash value, but your death benefit will be reduced.
Generally, a younger and healthier buyer will go with Term Life since it is a little cheaper and you are at less risk for dying early.
What You Need to Know about Term Life Insurance...
Term life policies provide coverage for specific periods of time, sometimes as little as one year. While you usually can renew term life policies for one or more terms even if your health has changed, there's potentially a big risk here if you get sick during the term.
* Tip. If your health does change, you probably won't be able to buy another term without watching your premium skyrocket. You should ask your insurer or agent what the premium will be if you continue to renew the policy.
* Note. You should also ask whether you will lose the right to renew the policy when you reach a certain age. Because this coverage is fairly cheap, it's often a good option for young people in good health who can't afford to buy "permanent" coverage.
Here are a couple of term life policy options:
1. Yearly Renewable Term Life -- This is coverage for a longer term, five, 10 or 20 years. The longer term also means that the costs to cover you are spread out so that you will avoid the potential for huge annual premium increases.
2. Convertible Term Life -- This is yearly renewable with the option to convert to a permanent policy in the future. The coverage, which often has the lowest cost and highest death benefit options of term insurance, can be a good choice for younger people who can't afford permanent coverage but who need a large death benefit and the option to convert to a permanent policy down the road.
What you need to know about Cash Value Life Insurance...
As we said before, Cash-Value policies tend to be a little more expensive in the beginning than most term polices. However, a Cash-Value policy doubles as an investment as well as your life insurance. Your premium is invested by your insurance company and can later be used by you in a variety of different ways. These are some of the specific types of Cash-Value policies:
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Whole (or Ordinary) Life -- Like other cash-value policies, this is permanent coverage. The cost is literally stretched out over your entire life, or what the insurance company expects your entire life period to be. Life insurers have tables that tell them how long, on average, someone of your age and physical health will live.
Say you want $500,000 in coverage. The insurance company's rates are based on how much they need to charge you in order to allow the company to recoup the eventual death benefit while you are alive. The premium and the death benefit don't change much in whole life policies. You pay so much a month for a given death benefit. However, dividends to policyholders can increase the coverage or decrease the premium.
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Universal Life -- This is the flexible life insurance. You can change your premium and your death benefit at any time, although a substantial increase in the coverage usually requires you to prove you are still in good health.
• Variable Life -- This is a hybrid whole/universal coverage in which the death benefit is dependent on the investment performance of the insurance company's assets. And you get to choose the investment vehicle -- money market fund, bond fund or stock fund -- for your premium.
* Note. If your investments do well, your policy's cash value and death benefit will increase. If not, they'll go down, but most variable life policies won't let your death benefit drop below a certain level. However, it's possible a company will charge you for a guaranteed death benefit.
So the big question is which of these polies will be right for you. Generally, if you have significant assets, it is usually best to go with one of the Cash-Value policies. But for someone just starting out, with a lower chance of having to cash in on your policy, it is better to go with a Term Life policy. That being said, your Resource Insurance Group agent can advise you in the direction you should go and look at all the specifics of your personal situation. There are literally thousands of options for your policy and it is always best to consult a trained insurance professional who has considerable experience with
life insurance. That is where we can help you. Give us a call today.