| Choosing
a Life Insurance Policy
Life insurance is an essential part of financial planning. The main
purpose of purchasing life insurance is to ensure that your dependents are
financially protected in the event of death. Life insurance is a way to
plan for the future so you need to be sure that the coverage you purchase
fits your needs.
There are many options
available to you when purchasing life insurance. Some policies provide
coverage for your lifetime and others provide coverage for a specific
number of years. With certain policies, you are able to combine different
kinds of insurance and even build up your cash value. Your choice should
be based on your needs and what you can afford.
Term Life Insurance
Term life insurance is an insurance policy that is in effect for a
specific period of time. If the insured dies within that timeframe, the
beneficiary of the policy receives the death payment. However, if the
insured survives that period of time, the beneficiary receives nothing and
the policy is closed. Term life also provides the ability to convert to a
permanent kind of coverage at a later time. The main reasons people buy
term life insurance include:
- Coverage for a specific
amount of time until they are able to build up their assets.
- Coverage for the amount
of time the mortgage is for so in the event of an untimely death, the
mortgage is taken care of.
- Coverage for those that
cannot afford a permanent policy, especially newlyweds and new parents.
Permanent Life Insurance
Permanent life insurance covers a longer period of time than term life or
for the entire life of the insured. This kind of insurance combines death
benefits with a savings component. The amount of money that is not used to
cover the amount of the insurance is invested by the company and builds up
a cash value that may be used in a variety of ways. You may borrow against
a policy's cash value by taking a policy loan. If you don't pay back the
loan and the interest on it, the amount you owe will be subtracted from
the benefits when you die or from the cash value if you stop paying
premiums and take out the remaining cash value. The cash may also be used
to increase your retirement income or to help pay for needs such as a
child's tuition without canceling the policy. However, to build up this
cash, you'll pay higher premiums. There are several types of permanent
life insurance, including whole, universal, variable universal, and
survivorship universal.
Whole Life Insurance
A whole life insurance policy remains in full force and effect for the
life of the insured, with premium payments being made for the same period.
Some whole life policies let you pay premiums for a shorter period such as
20 years, or until age 65. Premiums for these policies are higher since
the premium payments are made during a shorter period of time.
Universal Life Insurance
The premiums of a universal life insurance policy are split in two ways.
The premium you pay goes toward covering the cost of the insurance policy
and the remaining balance is invested and earns interest on a tax deferred
basis. With this type of life insurance you also receive a guaranteed
minimum interest rate on the balance that is invested.
Variable Life Insurance
Variable life insurance is an investment-oriented whole life insurance
policy that provides a return linked to an underlying portfolio of
securities. The portfolio is a group of mutual funds including common
stocks, bond funds, and money market funds. This type of life insurance
offers fixed premiums and a minimum death benefit. The better the total
return on the investment portfolio, the higher the death benefit or value
of the variable life policy.
Variable Universal Life Insurance
Variable universal life insurance is a combination of universal life
insurance and variable life insurance in that excess interest credited to
the cash value account depends on investment results of separate accounts
(equities, bonds, real estate, etc.). You have a choice as to how the cash
value is invested -- stock and bond mutual funds. However, there is no
guaranteed minimum interest rate with a universal life insurance policy.
Survivorship Universal Life Insurance
Survivorship universal life insurance provides a policy in which two
people are covered on one policy. The death benefit is paid upon the
second death. The premiums for this joint life policy are significantly
lower than a regular policy. Many people take this type of life insurance
to help pay estate taxes after the deaths of both a husband and wife.
Term Life Insurance vs. Permanent Life
Insurance
Deciding between term life and permanent life insurance is no easy task.
Each policy has its benefits. The younger generation tends to opt for term
life insurance. It provides maximum coverage at the lowest premium.
However, term insurance also has its disadvantages. This type of life
insurance provides a death benefit only for a specific period of time.
When the policy expires, so does the protection. While many term policies
are convertible to permanent policies, others may not be. So there is the
possibility of being uninsurable once the term policy expires. Also, with
term insurance, premiums increase with each renewal, so the policy can
become very costly.
Permanent life insurance,
on the other hand, can be the best long-term solution for many. Cash value
life insurance provides life-long insurance protection. As long at the
premiums are always paid, your policy will never be canceled. Although
permanent life insurance premiums are often more expensive than term
insurance premiums, your permanent life insurance policy can actually be
less expensive in the long-run. This is because most permanent policies
pay dividends, which can be applied toward the next payment. Therefore,
premium payments may end after several years, yet coverage will continue
for life. This kind of policy also allows for future loans, borrowing
against your established cash value.
Buying a life insurance
policy is an important financial decision. Before choosing your policy, be
sure you understand the kind of insurance you are buying, as well as the
advantages and disadvantages to each policy. To choose the insurance
company that is right for you click here.
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