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A Short Lesson in Life Insurance

Life insurance helps to ensure that your family and loved ones are protected against financial difficulties in the event of a premature death. Combined with investments, retirement and estate planning, life insurance is a fundamental part of a sound financial plan.

More specifically, life insurance provides cash to your family after your death. This cash (the death benefit) replaces the income you would have provided and can meet many important financial needs: It can help pay the mortgage, run the household, send your kids to college, and ensure that your dependents are not burdened with debt.

Deciding what life insurance policy to buy can be difficult. When there are so many choices, how do you know what insurance is right for you? There are advantages and disadvantages of having choices.

Keep in mind, the main reason for buying life insurance is to protect your family against loss of income (the income your family would lose if you should die before saving enough money to provide for them).

There are many kinds of life insurance, but they generally fall into two categories: term insurance and permanent insurance.

Term Life Insurance

Term insurance appeals to those who are looking only for protection in case of the insured's death. It is usually low-cost, with the premium increasing as the insured ages. If you are healthy, insurable, and need coverage, you may benefit from purchasing individual term life insurance.

This insurance provides the maximum protection for the least cost. It insures your life for a fixed period -- usually 5, 10 or 15 years -- and benefits are paid only if you die within that period. If you drop the policy before you die, your beneficiaries receive nothing.

If you live to the end of the term, no money is paid to you, and the insurance ends. Term insurance does not offer savings, investments, or loan features. It pays only if you die during the term of the insurance.

Some policies are renewable for an additional number of years. One kind of term insurance lets you renew the policy each year without a medical checkup. But the premium (payment) increases as you grow older. Other kinds of term insurance state that you must have a physical checkup by your doctor to renew the policy.

Term insurance also may be convertible. Convertible means you can switch to permanent insurance without being checked by a doctor.

Decreasing term is another kind of term insurance. With decreasing term, the premiums stay the same, but the benefits (amount paid when you die) decrease over a set period of time.

Credit life insurance is one kind of decreasing term. It is usually sold as part of a loan you make from a bank or finance company. It pays off the balance of the loan if you die before making the last payment. This kind of insurance protects the lender in case you are not able to pay off the loan because of death. Credit life often costs more than regular term insurance.

When you start making premium payments, term insurance costs less than other kinds of policies for the same amount of coverage. The cost of term insurance increases as you grow older.

Situations where term insurance may be the best option include:

You just want life insurance protection but at the lowest rate possible.
You have other assets and investments for retirement and do not plan to use life insurance to cover that need. If fact, you do not plan to need any life insurance protection after age 60.

Permanent Insurance

Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don’t intend to keep the policy for the long term, this may be the wrong type of insurance for you.

There are several types of Permanent Insurance:

Whole life or ordinary life is the most common type of permanent insurance. This policy requires payments to be made during your entire lifetime. It has a guaranteed death benefit, cash value, and an unchanging premium, but you have no say about how the money is invested.

Adjustable life is another kind of permanent protection that lets you change the amount of your premiums. You can also raise or lower the face amount of the policy, or shorten the protection period. If you increase the death benefit, you must prove that you are still insurable.

Universal life provides the protection of low-cost term insurance combined with the cash-value build-up of whole life. It features flexible premium payments, adjustable benefits, and a cash value that accumulates tax-deferred. You have more flexibility but pay more in administration costs. It does not give the most complete insurance coverage nor the most competitive savings.

Variable has a term insurance death benefit, and investments are chosen by the insured to be used for cash accumulation through tax-deferred investment growth. The cash value of the policy depends on how well your investments are doing. Variable life can be combined with universal life, thus creating variable universal life.

Choosing a life insurance product is an important decision, but it can be complicated. As with any major purchase, it is important that you understand your family's needs and the options open to you.

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