Learn More About life Insurance

Why consider life insurance?
Life insurance is an integral part of financial planning.  The chief function of life insurance is to financially safeguard your loved ones in the event of death by providing them with a lump sum of tax-free money after your death.  This money, also called a death benefit, can help your family meet important financial needs by replacing your income and paying for expenses.

Life insurance, in short, protects your family from economic tragedy.  There are various life insurance options available to you.  Some policies provide coverage for a specific number of years.  Certain policies allow you to combine different types of insurance and even build up cash value.  Your decision should be based on needs of you and your family and what you can afford.

How much insurance is enough?
The majority of Americans are under insured.  The following information will give you a basis to follow in determining how much life insurance you need to protect your loved ones.

Most professionals believe there are three essential parts of the puzzle:

  1. Covering your total debt obligations
  2. Providing a lump sum of money to spin-off income to replace the breadwinners income.
  3. Factor in children's educational expenses of course, other unknown expenses could also be accounted for.

The general consensus is that the replacement of the breadwinner's income is the most important.  The basic role of thumb when calculation for the lump sum needed using life insurance is to take an interest rate factor that you are comfortable with and multiply that rate by $100,000.

For example: $100,00 X 4.8% = $4800 in annual interest income.  If your family needed $48,000 of net income you would need $1,000,000 of life insurance coverage.

Term life -vs.- permanent life
The main difference between term life insurance and permanent life insurance is simply that term life insurance comers you for a a specific period of time, or term, while permanent life insurance covers you for your entire life.

Term life insurance will give you the maximum coverage at a lower initial premium. However, the premiums of term life insurance increase as you get older and once the the time period of term life insurance has expired your policy and coverage is no longer in force.

Permanent life insurance cannot be canceled as long as you pay your premiums. Although the premiums for permanent life insurance are generally higher, this policy builds cash value which can be used to curtail the payment period. There are several types of permanent life insurance - whole life, universal life, and variable life.

Types of insurance
Term life insurance covers you for a specific period of time, called a term, instead of for your entire life. So if the insured dies within that particular period of time, then the beneficiary receives the the payment of the death benefit. However, if the insured lives past the time frame, then the beneficiary receives nothing as the policy is no longer in force. People often purchase term life insurance to cover shorter-term debts like a mortgage or car loan. While term life premiums are usually lower than permanent life premiums, they increase as you get older. Term life can include the option to convert the policy into a permanent policy in the future.

Permanent life insurance covers the entire life of the insured person. Different kinds of permanent life insurance include whole life, universal life, and variable life. As long as you pay your premiums your beneficiary will receive a death benefit. This type of insurance contains a death benefit and a savings element called a cash value. The portion of your premium that is not used to pay for the death benefit is invested by the company which builds up a cash value, which is tax-deferred, and may be utilized in various ways. The cash value can be used to curtail the payment period, take a loan for college expenses, or the policy can be surrendered and the cash value can be received lump sum. Premiums for permanent life insurance are generally higher than term life insurance because of the cash value. However, the younger you are when you buy the policy, the lower the premiums will be.

Whole life insurance is in effect for the life of the insured. The amount of the premium payments remains the same over the life of the policy and must be paid periodically for the coverage to remain in effect. Some policies allow you to pay premiums for lesser periods or until age 65. Premiums are higher for these types of whole life policies. Your premium pays for the cost of the death benefit and then the insurance company invests the balance of your premium in your policy's cash value account which earns interest. The most common type of whole life policies have a fixed guaranteed interest rate and guaranteed death benefit costs.

Universal life insurance covers the entire life of the insured, as long as the premiums are paid. Premiums are split into two ways. The premium paid pays for the cost of the death benefit and the remaining balance is invested in the cash value of your policy which earns interest. This type of life insurance usually guarantees a minimum interest rate on your cash value. After the first premium payment premiums can be paid at any time, in any amount that that meets the policy's required minimum and maximum payment. The death benefit can also be reduced or increased more easily than a whole life policy but the death benefit costs are not guaranteed.

Variable life insurance is a type of life insurance that incorporates investing the cash value portion of the premium into the stock, bond, and money market funds of a company's portfolio. While the cash value of variable life insurance is not guaranteed, the insured has control over how the money is invested. The cash value and death benefit are determined by how well your investment selections are doing. This type of life insurance usually has fixed premiums.

Home  |  Disability  |   Health  |  Life  |   Long Term Care  |  Medicare Supplement

Life Insurance Glossary

-  Top of Page -