Life Insurance 

Do you want to make provisions for the welfare of your family after your death but find the subject of life insurance confusing or intimidating? Read on, because it's probably easier to understand than you think, and the rewards can be substantial.

 Life insurance is a financial resource for your loved ones in the event of your death. You enter into a contract with an insurance company that promises to provide your beneficiaries a certain amount of money upon your death. In return, you make periodic payments, known as premiums. The size of the premiums is generally based on factors such as your age, gender, medical history and the dollar amount of life insurance you select. Some policies may require a medical exam before premiums are established.

Certain types of life insurance may also provide benefits for you and your family while you're still living. Policies such as whole life or universal life accumulate cash value on a tax-deferred basis, and that value can be used to supplement your retirement income or help provide for a child's education. Life insurance is an important part of anyone's financial portfolio. Financial advisors often recommend developing a financial plan that includes an appropriate amount of life insurance as part of a comprehensive strategy for financial security.

What kind of life insurance and how much, if any, do you need? Take a few minutes to learn the basics so you can make an informed decision.

There are several types of life insurance and there are many decisions you will have to make when assessing your life insurance needs. The first of which, is whether you need permanent insurance or term insurance. A simple way to understand the differences between these two types of life insurance is by comparing them to something familiar to all of us—finding a place to live.

To take a very simple approach, think of buying permanent life insurance as owning a home, while buying term insurance as renting one. There are advantages and disadvantages to both. Like owning property, owning permanent life insurance is usually an appropriate way for people to meet long-term needs. Over time, it may be the least expensive form of life insurance since payments may be fixed and it builds equity. Plus, this equity (called the cash value) accumulates on a tax-deferred basis.  In contrast, purchasing term insurance, like renting property, is usually an appropriate way for meeting short-term or temporary needs. Initially, premiums are often very affordable. However, lower premiums increase over time with age, and term policies build no cash value. Therefore, a term policy purchased to provide a lifetime of coverage could actually cost more than a permanent policy.

Own vs. Rent

Permanent Insurance

Higher initial premiums but . . .
Guaranteed level premiums
Guaranteed cash value
Guaranteed death benefit
Tax-deferred cash value growth

Term Insurance

Lower initial premiums but . . .
Premiums increase with age 
No cash value
Usually temporary coverage

Here are descriptions of the basic types of life insurance.

Term life insurance offers protection that insures your family for a specified period of time–usually anywhere from one to 20 years. A term policy pays a benefit if you die during the period covered by the policy. If you stop paying premiums, the insurance stops. These policies do not build a cash value.

Whole life insurance or permanent insurance provides protection, as well as a cash value. Additionally, many companies pay policyholders an annual dividend. Dividends provide both flexibility and increased value to your life insurance policy. They can add more coverage to your overall insurance benefits and can build a sizable cash value. They are not, however, guaranteed. Of course, life insurance should not be purchased solely for accumulation. Its primary purpose is protection.

Universal life insurance is flexible. These policies are interest-sensitive and permit the owner to adjust the death benefit and/or premium payments, within limits, to fit the individual’s situation. Your premiums are credited to an accumulation fund, from which costs are deducted and to which interest is then credited. As with whole life insurance, the cash value is yours. You may withdraw it or borrow against it at any time. Read your policy carefully to understand how loans and withdrawals affect the death benefit.

Variable life insurance is for those who want to tie the cash value of their life insurance policy to the performance of the financial markets. You decide among several investment options how your net premiums are to be invested. While monies invested in the investment options have potential for significant growth, such funds are subject to market risks including the loss of principal. In other words, some may make or lose money depending upon the performance of the market and the investment options you select.

How Can I Conserve Costs?

Buying life insurance is a significant, long-term purchase for most people. Here are some ways you can save money while purchasing the life insurance that’s right for you:

1.       Don’t buy insurance if you don’t need it (for example, if you have no dependents), and don’t buy more insurance than you actually need to provide for your loved ones.

2.       Shop for a competitively priced policy while you are in good health. Don’t smoke. Take care of yourself by exercising regularly and maintaining a moderate weight.

3.       Look for a guaranteed renewable policy if you buy term insurance. That way you won’t have to shop for a new policy (with higher premiums) when you’re older, nor will you have to pay extra if your health deteriorates.

4.       Buy additional riders, which are optional forms of coverage, only if you really need them.

5.       Participate in your employer’s sponsored group life insurance program, even if you have to pay for it. This form of life insurance coverage, known as group insurance, pools good, average and poor risks to offer a benefit that is generally less expensive than most comparable plans offered outside of work. You can obtain coverage up to a certain level without providing evidence of good health, a key advantage. Additionally, group insurance plans typically provide for continued coverage during periods of disability. Most plans are administered through payroll deduction, a very convenient way to pay for coverage. And finally, most plans allow you to continue your coverage even after you leave employment simply by continuing your premium payments or converting your coverage to an individual policy.

6.       Shop around and compare prices, coverage and company quality. There are more than 2,000 companies selling life insurance policies. Get at least three quotes on comparable policies, and ask questions about the policy’s renewal and withdrawal provisions.