What Kind of Life Insurance Should You Buy?
When it comes to life insurance, the answers aren't easy. What type to obtain and whether you even need coverage depend on your particular situation. As agents generally work on commission, you cannot always count on their advice being in your best interest. Acquaint yourself with the basics before subjecting yourself to sales pitches.
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Function
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Life Insurance is a type of coverage that pays out a lump sum if the policy holder dies during the period of time the policy is in effect. The policyholder pays premiums that the company invests. If the policy holder dies before the policy is paid up, in the case of a whole life policy, the insurance company may actually lose money
Who Benefits?
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Insurance payouts are made to previously selected beneficiaries. This may be spouse, children, parents or anyone who is financially dependent on the policyholder. If you do not have any dependents, or you have sufficient savings to pay your final expenses, and provide for your family, you may not need to purchase life insurance.
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Types
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Term life insurance pays out if the insured dies within the term specified when the policy is written. If the policy is written for a period of 10 years, the holder pays premiums and is covered for just that period. This is the cheapest form of life insurance, and is renewable but not necessarily at the same premium. If the insured does not die during the covered period, the company keeps the premium money.
Whole life insurance is effective during the lifetime of the insured, as long as premiums do not lapse. It accumulates interest during this time, making the payout greater at the time of death. Some policies pay dividends as well.
Universal life insurance allows the insured to adjust the term of coverage and the premiums to suit his current needs. It is the most flexible type of policy, and remains active for as long as the cash value covers the cost of the policy.
Variable life insurance lets the insured decide how the insurance payments should be invested. How the policy performs is tied to the performance of the markets. Premiums are fixed, but the face value of the policy may fluctuate.
Universal variable life insurance is the most aggressive type of policy and should only be considered by those who can afford the financial risks.
How Much?
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How much life insurance you need is usually based upon either income replacement or individual need. Income replacement is calculated by taking annual income and multiplying by 5 or 10. Individual need takes into account factors such as mortgage, family living expenses and potential college tuition. In choosing which method, consider your marital status, number of dependents, your financial resources and end-of-life expenses such as funeral costs, medical bills and estate taxes.
Warning
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If you smoke, are overweight or have serious health problems, expect to pay more for life insurance (if you can get coverage at all). Age also affects the cost of premiums. Be up front with the insurance company; it will conduct an investigation before paying out a large claim.
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