Life Insurance Basics
This type of insurance can help you secure the financial future of your loved ones.
The vast majority of people who shop around for life insurance do so for one reason. It offers some measure of financial security for loved ones should they pass away unexpectedly.
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. It can also help pay for 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. Some types of life insurance build up a “cash value” over time. These funds would paid out if policyholder’s passed away. Otherwise, the funds can be borrowed against or withdrawn after a certain point in time or after a certain amount of value is accumulated.
For some, the pressure of paying their premiums transforms their life insurance policy into a “forced” savings plan. And they can turn to these funds in the future, should the need arise.
A Couple of Questions to Consider
Here are a few questions you may want to ask yourself before you purchase any 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
First, don’t forget to factor in any life insurance plans you already have in place. These could be veteran's insurance or a group policy that's 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.)
The premiums for this type of life insurance are usually lower than the premiums you'd 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.
As mentioned earlier, whole life policies accumulate a cash value up to its maturity date. 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. The related death benefit stays the same through the entire term in the former and dropping over time in the latter.
Whole life insurance offers even more options to would-be buyers. The most common are (traditional) whole life, universal life, variable life, and variable-universal life.
To learn more about the aspects of each whole life variation, read, “What are the Differences Between Term Life and Whole Life Insurance?”
How Much Life Insurance Do You Need?
Once you’ve decided on term or whole life insurance, your next question should be: how much coverage do I need, or how much should I purchase?
Answering that question should be easy enough if your goal for is to create an inheritance for someone or make a contribution to an organization. When that's the case 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 dependents, answering it may be hard. One rule of thumb revolves around buying enough life insurance so that the benefit replaces the income your income.
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 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
Here are a handful of questions you should consider asking your agent if you want to make the most informed purchasing decision:
- 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?
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.
- Questions and Answers About Life Insurance
- Basic Types of Life Insurance Policies
- Why Should I Buy Life Insurance?
- How Much Life Insurance do I Need?
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