Life Insurance Basics

This type of insurance can help you secure the financial future of your loved ones.

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The vast majority of people who shop around for life insurance do so for one reason: to offer some measure of financial security for loved ones—such as a spouse, children, parents, or siblings—should they pass away unexpectedly or in an untimely manner.

The most common example of this involves parents who want to financially provide for young children who currently depend on their income for survival.

Life insurance also is regularly called on to safeguard the lives of adult dependents, such as older children, grandparents, parents, or siblings.

Couples often find this kind of insurance appealing, too, especially in cases where the death of one partner would cause the other to suffer financially.

The reasons mentioned above aren’t the only ones that prompt people to obtain life insurance, though; sometimes they do so because they want to:

Cover funeral and burial costs—Life insurance can help survivors with both of these not-insignificant costs following a loved one passing away, and it also can keep them from worrying about probate and other estate administration costs, as well as medical expenses and associated debts that an individual’s health insurance doesn’t cover.

Create an inheritance—This is achieved by purchasing life insurance and then naming the inheritor as the policy’s beneficiary.

Make charitable contributions—You also can use your life insurance policy’s “death benefit” to contribute to a charity or charities that are near and dear to your heart.

Be forced into saving money—As you’ll learn more about below, some types of life insurance build up a “cash value” over time that, if it isn’t paid out as a result of the policyholder’s passing, can be borrowed against or withdrawn after a certain point in time or after a certain amount of value has been accumulated.

For some people, the pressure of paying their premiums basically transforms their life insurance policy into a “forced” savings plan that they can turn to in the future, should the need arise.

A Couple of Questions to Consider

Given the above, here are a few questions you may want to ask yourself before you decide on, or follow through with a purchase of, any particular type of life insurance:

  • How much does my spouse, or do my children, rely on my income?
  • Does anyone else depend on my earnings, such as a parent, a grandparent, or even a brother or sister?
  • If something were to happen to me, would those family members be able to get by, or would they suffer, financially speaking?
  • How will my loved ones pay my funeral and burial costs or repay any debts I may have should I pass away unexpectedly or in an untimely manner?
  • How about estate taxes? Will anyone have to pay them after my passing? If so, how will they pay them—or will they be able to pay them?
  • Could inflation affect the future needs of my spouse, children, or other dependents? If so, could some form of life insurance help ease that burden?
  • Would I like to leave money to certain family members or specific organizations (charitable or otherwise) in the event of my passing?

Two Other Considerations

While weighing your life insurance options, don’t forget to factor in to your calculations or considerations any life insurance plans you already have in place—such as veteran's insurance or a group policy that has been provided by your employer.

Also, don't forget to include Social Security benefits or survivor's benefits related to a pension plan.

The Different Types of Life Insurance

With that out of the way, let’s take a look at the different types of plans you’re going to compare and contrast while shopping around for life insurance.

At the broadest and most basic level, the two kinds of life insurance are:

Term Life Insurance—This type of policy covers you for a specific period of time, such as 10, 20, or 30 years. It only pays out a benefit if you die during that particular “term.”

Also, unlike whole life insurance plans, no savings element is associated with term plans. (The latter don’t accumulate a cash value over time as the former do.)

As for the premiums that accompany this type of life insurance, early on they’re usually lower than the premiums you would pay for a comparable level of whole life insurance, although under most circumstances term rates will rise as you age.

Whole Life Insurance—If you’re looking for insurance that will provide protection for the rest of your life, a whole life policy may be the product for you.

Another of the potential benefits:  as mentioned earlier, whole life—also known as permanent or cash value—policies accumulate a cash value up to its maturity date, and you can use or borrow against that amount in various ways (usually after a certain period of time has passed) without canceling the policy.

Generally speaking, the premiums you’ll pay for whole life insurance will be higher, at least initially, than those you would pay for the same amount of term life insurance. Unlike most term premiums, though, those associated with whole life tend to remain level throughout the life of the policy.

Varieties of Term and Whole Life

Within the term and whole life insurance categories, there are a number of varieties or variations from which to choose.

The two main varieties of term life insurance are called level term and decreasing term, with the related death benefit staying the same through the entire term in the former and dropping (often in one-year increments) over time in the latter.

Whole life insurance offers even more options to would-be buyers, with (traditional) whole life, universal life, variable life, and variable-universal life being the most common.

To learn more about the unique aspects of each of the whole life variations, read another of our articles, “What are the Differences Between Term Life and Whole Life Insurance?

How Much Life Insurance Do You Need?

Once you’ve decided whether you need term or whole life insurance—as well as which variety of term or whole life insurance would be most appropriate given your situation—the next question you’re likely to ask yourself is: how much coverage do I need, or how much should I purchase?

Answering that question should be easy enough if your goal for your purchase is to create an inheritance for someone or make a contribution to an organization, as in cases like that you just pay for enough life insurance to match the amount you’d like to give away.

If your goal is to provide a financial safety net for a spouse, your children, or other people who are dependent on your income, answering it may be a bit more difficult. That said, one rule of thumb that may be worth keeping in mind revolves around buying at least enough life insurance so that the related benefit replaces the income you currently generate for the dependents in question.

You’ll want to buy even more than that, though, if you’d like to, say, offset any “hidden income” that may be lost if you are deceased. A few examples of this kind of often-forgotten (in these kinds of circumstances, at least) income: the contribution your employer makes to your retirement plan and its subsidy of your health insurance premium.

Three More Questions for Your Agent or Broker

Last, but not least, here are a handful of questions you should consider asking your agent or broker if you want to make the most informed purchasing decision possible:

  • Will the premiums or benefits associated with this plan vary from year to year?
  • How much, or how quickly, do the benefits tied to this policy grow, if at all?
  • Is any portion of the premium or benefits not guaranteed? If so, which portion?

On a related note, remember that no one provider offers the lowest premiums for all kinds and amounts of insurance, so take your time, do your research, and field quotes from a number of different companies.

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