Life Insurance Basics
The question to ask yourself when considering life insurance is this: would your family have enough money to carry on without you? If the answer is, "yes," you may not need it. If the answer is, "no," you probably do. Try to get it through work, a union or association to save money with group rates. If not, individual policies are available, too.
Term Insurance vs. Permanent Insurance. Which is right for you?
Deciding between term and permanent insurance can be tricky. Term is cheaper right away, but the premiums usually increase every year and it only pays out if you pass away within the stated time (term). Permanent costs more during the early years, but includes a savings feature that may end up being worth more than the amount you pay in premiums - and pays your beneficiaries no matter when you pass away. So how do you decide? Generally speaking, if you're going to have the policy for 10 years or less, choose term. If you'll keep it 20 years or more, choose permanent. In between 10-20 years, consult a professional.
Term Insurance
People usually select term insurance to cover specific financial obligations, such as mortgages or college tuition, because it only pays if the covered person passes away within the stated period of time (the term). Die the day after and your family doesn't get a dime. So what's the point?
Let's say you have 5 years left on your mortgage, at $1,200 a month. That's a $72,000 obligation your family might not be able to meet without your paycheck. But by purchasing a five-year term $75,000 policy, your family may not have to move.
Term is cheaper than permanent insurance because short-term coverage is lower risk for the insurer. However, the longer the term the more expensive it becomes. In fact, your premiums may increase every year, unless you choose a version that locks the premium in.
There are four versions of term insurance available:
- Convertible. This version can be converted into permanent coverage at any time without a medical exam. Premiums may increase if you do.
- Term. When it expires, you can create a new term policy without a medical exam, but the premium may be higher. The premium is also likely to increase every year.
- Level. The cost of this version stays the same every year, as do the benefits. If you want to renew at the end, you can expect a significant increase in premium, however, as you will have aged.
- Decreasing. In exchange for premiums that remain the same during the term, the benefit of this version decreases the more time passes.
Permanent Insurance
People usually select permanent insurance (or Whole Life, as it's also called) for the peace of mind of knowing their beneficiary will receive money no matter when they die. And because it includes a savings feature that builds up cash they can tap into while they're still alive. Permanent insurance is more expensive than term, but has four variations to fit different needs:
- Whole life. You pay a fixed premium your entire life for a fixed benefit at death. It includes a cash savings feature that may, over time, grow to a substantial amount.
- Universal life. This gives greater flexibility than whole life as you may be able to change the amount of coverage you get as your needs change. Some changes may require a medical exam.
- Variable life. This invests some of your premiums in the market to try to increase your benefit. It usually includes a minimum guaranteed death benefit, but not a minimum cash value.
- Variable-Universal life. This combines the premium and death benefit flexibility of universal life with the investment flexibility and risk of variable life.
Take Action
- Use these interactive tools to find out how much life insurance you may need: moneycentral.msn.com and www.bankrate.com
- Answer these questions to find out what type of life insurance suits your needs at www.bankrate.com
- Look for an insurer in your state for any type of insurance, using an online service from the Insurance Information Institute. See the box titled "Individuals" at www.iii.org.
- Be sure that the insurance company offering the policy will be financially sound when, or if, it comes time to pay your claim. Use these services:
- A.M. Best
908-439-2200
www.ambest.com
- Moody's Investors Services
212-553-0300
www.moodys.com
- Standard & Poor's Insurance Ratings Service
212-438-2000
www.standardandpoor.com
- A.M. Best