29 July 2012
Life Insurance: Protect What You Have

Life insurance can be an important part of sound, savvy personal financial management by protecting everything you’ve worked so hard to earn. It may protect your spouse in the event of premature death, send the kids to college, and hold a family together during a crisis.

Even if you know you need insurance, shopping for the right coverage to protect your family and your assets can be like learning a new language. Term life, whole life, universal life, actual cash value, dividends, loans against policy — finding the right coverage for your needs may take a little research.

One method to help determine how much life insurance you need:  add up estimated funeral costs, outstanding personal debt, mortgage debt, and the prospect of paying tuition and other large expenses that would drain family resources. Estimate the daily living expenses for your family for a single year.

Then multiply by a factor between 5 and 10. Use the lower factor if you don’t have a lot of debt, and the higher factor if you’re carrying a couple of mortgages and you have children to put through school. That’s how much life insurance you may need to protect your family and their lifestyle.

Here’s a starter course on getting the most for the least in life insurance, while maintaining the protection you and your family need.

Types of Life Insurance

There are two basic types of life insurance.

Term life insurance is the simplest to understand. It’s also the most economical protection you can buy.  Term life insurance is paid when the insured (you) pass on within the “term” — a defined length of time your life insurance coverage is in effect. Term life comes with a variety of time frames: five-, ten- even thirty-year terms are available.

Usually, the younger you are, the lower the cost of the monthly premium — the dollar amount you pay for protection each month. Premiums are calculated based on two factors — your age (and general health), and the dollar amount of protection you want. Simply put, a $100,000 term life insurance policy won’t cost as much as a $500,000 policy because you’re buying less protection.

With term life, you keep things simple. The insurance company pays X amount of dollars to the beneficiaries when the insured individual passes on, as long as the death occurs during the term of the policy.  Term life policies don’t accumulate value and you can’t borrow against them.

The other class of insurance may be called permanent insurance.  Whole life, universal life, variable life, and variable universal life all fall into the general class of coverage called permanent life insurance.

The first difference between term and permanent life is that permanent life is intended to cover you from the day you buy the policy until you die (assuming that you pay your insurance premium each month). There is no term (length of time coverage is in effect) to permanent life. If you buy it when you’re young, your premiums are generally lower and you’ll start building cash value through the years.

That’s the other main difference between term and permanent life insurance coverage.  Permanent life builds cash values that can be used to lower monthly premiums, or they can be allowed to grow.

Once the permanent life policy has accumulated enough cash value, you can borrow against that cash value. The downside to taking loans against the cash value is that it lowers the payout to family in the event of the insured individual’s death.

Although a permanent life policy does increase in value while providing protection for your family, the cost of coverage is also higher. Expect to pay more for $500K of permanent life versus $500K of term life insurance, because permanent insurance provides lifelong protection with generally level premiums, and also features a savings component.

Calculate your coverage needs using the criteria listed above. Don’t think of permanent life as a money-maker. It’s not intended solely to increase your wealth. That’s an important side benefit, but the primary reason for purchasing permanent life, as with any other life insurance, is to protect your family in the event of your premature death.

Life Insurance Sources

There are hundreds of insurance companies and even more life insurance products, so talking to a knowledgeable professional is a good first step.  An insurance broker or agent can advise you, but keep in mind that each offers products from a limited number of insurance providers, and may tell you that those products are the best value.

If you do the math yourself, you will know going in approximately how much coverage you want to buy.  Then it’s just a matter of finding a reputable insurance company offering competitive rates and the benefits you’re looking for.  Look for an insurance company that’s ranked highly by Standard and Poors®, A.M. Best®, or other rating organizations.

Your employer may offer life insurance as part of your benefits package. You may be able to increase the dollar amount to provide the coverage you need, with premiums deducted automatically from your paycheck. Ask your company’s Human Resources department for details.

Unions, associations and other organizations can also be sources for low-cost term or whole life coverage.Purchasinglife insurance coverage through an industry association, for example, may get you group rates that translate into more coverage at a lower monthly premium. On the other hand, when you purchase insurance through your union or your employer, you usually don’t have a choice of insurers, and that may be an important point to consider.

It’s your choice. Making the right one can save money and deliver the peace of mind you only get from quality life insurance protection.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice, or a solicitation to purchase insurance products.  Please consult a professional for assistance concerning your specific situation.

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