Things You'll Need:
- Insurance ratings
- Calculator
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Step 1
Determine if you need life insurance. If no one, such as a spouse or a child, depends on your income, then it's pointless for you to insure yourself. Life insurance is protection against lost income--no more, no less. Similarly, if you are well-off financially, your family may not need an influx of cash when you die.
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Step 2
Calculate how much coverage you'll need. Determine how much your beneficiaries need to live on, and for how long. Losing a loved one is difficult emotionally and financially, and many dependents will want a period in which they won't have to worry about money. While two years is the average cushion, some people may want to make sure their beneficiaries are set for life. Calculate all expenses for the covered period, including big ticket items like college and mortgages, as well as living expenses like clothes and food. Then subtract the amount of money you think your beneficiaries will make from salaries and investments (remember, they may not go back to work right away). By subtracting all estimated expenses from the income that you estimate your beneficiaries will earn, you get a basic idea on how much insurance coverage you need.
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Step 3
Choose what type of coverage best meets your needs. Insurance is protection, not an investment. Think of insurance in terms of decreasing responsibility as you get older. When you are younger and have kids and a mortgage, you need protection. As you get older, your kids have graduated and you likely have few or no payments left on your mortgage, so you need less protection.
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Step 4
Term life insurance is the simplest way to go--you pay the premium and are covered for a specific benefit for the period during which you want coverage. When you stop paying, you stop being covered. Term is a much cheaper option in the long run, and you can invest the money you would have otherwise paid for whole life insurance in mutual funds.
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Step 5
Universal life policies allow you to adjust your premiums as well as your death benefit. Variable life lets you choose how to invest the policy's cash value. A portion of what you pay in premiums goes into a cash value, which could increase over time and can be redeemed before your death. Unfortunately, the mortality expense of all cash value policies goes up significantly after age 60, so that you could be in the situation where your payment goes up drastically or your investment account used to pay your premiums quickly dries up. If you die with a large cash value balance, your beneficiary still gets only the face amount, not the face amount plus the cash value.
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Step 6
Whole life insurance has significant drawbacks. First, the premiums are generally far more costly--especially in the early years of the policy, when you're mostly paying commissions rather than building cash value. Second, if you have to cash out the policy early, you may have to pay a surrender charge.
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Step 7
Check the ratings. Insurers run the gamut from shaky upstarts to household-name institutions. Most companies are rated for financial strength and claims paying ability by independent rating agencies. Ratings from A.M. Best, Moody's, and Standard and Poor's are the most often cited.
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Step 1
"Borrow" money from a cash value life policy as an absolute last resort. If you own a home, consider an equity line before borrowing from your cash value. With an equity line, your interest is deductible and you will most often get a better rate than the insurance company is willing to offer. (See How to Obtain a Home Equity Loan.)
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Step 2
Contact your insurance company if you have no other options and find out how large your cash value is and how much you can borrow. The amount available to you depends on how much cash has accumulated in the policy. That, in turn, depends on how long the policy's been around, how much you've paid into it, and other factors. For example, if you have a $300,000 policy with a cash value of $50,000, your borrowing capability will be based on the $50,000 cash value.
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Step 3
Understand that when you borrow against your cash value, you must pay interest on the amount you borrow. The interest you pay does not go into your cash value, as many people think. Instead it goes back into the pockets of the insurance company.
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Step 4
Carefully check the terms and conditions of the loan. Some insurance companies restrict how much of your cash value you can borrow, and some have special payback terms. Make certain that the interest rates are lower than what other loan sources, such as home equity loans, are offering.
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Step 5
Withdraw the money. There is no restriction on how you can use the money, as there is with a 401(k) withdrawal, for example. You don't ever have to pay it back, as long as you're willing to have a reduced death benefit for your beneficiaries when you do pass away. But, you'll also pay interest on it for the rest of your life. On top of that, any interest you owe on that loan will also be deducted from the payout.
Comments
insuranceguide said
on 10/7/2009 ya its good but it had taken more time.
for short and simple information
http://completeinsuranceguide.blogspot.com
Fleemarkets said
on 10/6/2009 Great article…here is another good article I came across that will help you make the right decision. http://www.livequalitylifestyle.com/Insurance/Term-vs-Whole-Life-Insurance.html
russianbear said
on 6/10/2009 For some reason my prior comment was cut off before I finished. I was saying:
...I intend to give my family the gift without condition; whether I die young or old. Isn't it the way we supposed to treat those we love?
Thank you. This is just my humble opinion.
russianbear said
on 6/10/2009 With all due respect, this is just one point of view. It is based on "need"; and IF we are to define everything by pure "need for money", then yes these might be valid ideas.
However, life insurance is based on love and not on "need". Let me explain.
If I die tomorrow, my wife and kids will most likely "make it" financially even if they do not get a dime. At the same time, I find it comforting to know that if I am dead before my time they will get almost a million dollars. (I own maximum of what I could get approved for based on my income).
They may not "need" the money but they will certainly be greatful for my ultimate gift; and by the way they are getting it no matter what because I own whole life policies. It is not term bound to expire with 90 per cent certaintly; and it is not universal life that can be put in jeopardy if I decide to "save" by paying bare minimum.
I intend...
ronaldroadster said
on 6/9/2009 Great info! I searched for a good life insurance policy that was affordable after i read this article. After searching i saw how expensive life insurance can be, which i cant afford. Well my friend told me to fill out a free quote form online where i can compare and shop on life insurance that was affordable. I found a very good life insurance policy that is very affordable now. I thought i would share with everybody how i found my affordable life insurance, here it is: http://cli.gs/affordable-life-insurance-quotes