by Kathleen Seligman
6/17/2006 As you go about your normal routine, working, taking care of your family, and enjoying life, the last thing you probably want to think about is leaving this world. But while dying isn’t something you can avoid, with the right life insurance policy, you can make sure that your loved ones are taken care of even after you’re gone.
When you purchase a life insurance policy, you chose a beneficiary who will be paid a lump sum after you die. That money can be used to cover funeral costs, medical expenses, a mortgage, or any other bills you leave behind. Getting an insurance policy is fairly easy. There are dozens of life insurance companies both in person and online just waiting to insure you. As you apply for life insurance, you’ll likely need to undergo a basic physical exam by a registered nurse to prove you’re insurable.
The cost of a life insurance policy can vary according to your age, health, hobbies, occupation, and coverage amount. As a smart consumer, you’ll want to collect several life insurance quotes before you make your decision, and the Internet makes the process quick and easy. You’ll only need to answer a few questions about your age and habits, along with how much money you want, and life insurance companies will contact you either through email or over the phone with various quotes. You can also likely get basic life insurance through your work, and many employers will offer you the chance to expand your company’s life insurance options.
But before you fill out insurance forms or schedule an examination, you first need to decide which kind of life insurance policy you need. Fortunately there are several types of life insurance plans to help address your individual situation including whole, term, and variable life insurance as well as accidental death and disability insurance.
Whole Life Insurance
Whole life insurance, also known as permanent insurance, combines investment with insurance and will cover you as long as you pay your premiums. These insurance premiums will never increase over the life of your policy, and your benefits will never decrease. In whole life insurance, part of every premium you pay goes into a tax-free investment fund that acquires cash value and can be borrowed against or listed as an asset when you apply for a loan. The exact percentage of your whole life insurance premiums that go toward this investment fund depends on your specific life insurance policy.
Whole life insurance comes in three forms: single premium, interest sensitive, and traditional. Single premium whole life insurance, where you opt to pay for your entire insurance policy at once, is the most expensive insurance choice, and while interest does accrue on this amount, it does not add up as fast as an IRA or 401(k).
The cash value on an interest sensitive whole life insurance policy goes up and down according to market interest rates. This insurance type is more risky than other types of whole life insurance but offers the opportunity for larger long-term returns. The longer you plan to hold your life insurance policy, the more likely interest sensitive risks will be offset by a productive economy.
If you’re not one to take financial risks, however, a traditional whole life insurance policy may be more appropriate for you. Traditional whole life insurance guarantees a minimum cash investment value from your regular monthly premiums. Like other forms of whole life insurance, these premiums build cash value over time, and if you lose your job or are unable to make your payments, you can use the money from your investment to pay your premiums.
Term Life Insurance
A term life insurance policy can be both cheaper and more flexible than whole life insurance. If you decide on a term life insurance policy, that policy’s amount and policy length is entirely up to you. When trying to decide on your policy amount, a safe rule of thumb is to have 6-10 times your annual household income. Unlike a whole life insurance policy, all money paid on a term life policy goes toward the insurance and none to investments.
Among the many timelines available with a term life insurance policy, the most popular plans are annual, 7- and 10-year policies. The premiums for an annual term life insurance policy increase a little bit each year. Premiums for 7- and 10-year plans increase each time their cycles end, and though they remain the same for a longer period of time than an annual, their rate of increase will be higher than the annual policy. You can also take out a term life insurance policy for as long as 30 years if you’re willing to pay a higher premium.
Term life insurance can initially be the least expensive life insurance choice. Whereas a healthy, non-smoking 35 year-old male may pay thousands each year for a $100,000 policy, insweb Insurance Online explains that that same person might only pay about $100 per year for the same amount of term life insurance. That amount, however, is not fixed, and will increase over time – possibly to as much as $12,000 a year by the time the same man reaches age 70. This kind of life insurance is best for short term needs, such as to cover mortgages or a child’s tuition.
Variable Life Insurance
Variable life insurance is similar to whole life insurance as it also combines insurance with investment by allocating a percentage of your premiums to tax-free mutual funds. The difference with variable life insurance is that you get to choose how your money is invested. Given the percentage of your premium that goes toward investing, you decide whether you want to invest in equity, money market, bond funds, or any other options included in your life insurance company’s investment portfolio.
Premiums for variable life insurance remain the same over the life of your policy, but death benefits can fluctuate with the market. Some life insurance companies will guarantee a minimum death benefit, though this is becoming more rare and expensive. With a variable life insurance policy, you also cannot withdraw money from that policy during your lifetime.
Accidental Death and Disability Insurance
Accidental death and disability, also known as accidental death and dismemberment, insurance may seem to be the most morbid insurance type. It is, however, very practical since an accident may not kill you, but still render you unable to work. Accidental death insurance is also by far the easiest insurance to obtain and large-amount policies are the cheapest around. This type of insurance pays you or your beneficiary a lump sum when you die or are seriously injured due to an accident. The most common types of payable injuries include loss of limbs or eyesight, with each kind of injury earning different amounts of money.
Helpful Life Insurance Tips
• Make sure you buy enough life insurance to meet your needs.
• Buy life insurance when you’re young and healthy. The younger and healthier you are, the cheaper life insurance policies are.
• Shop around for the best life insurance quotes.
• The money you save on term life insurance policy premiums can be invested however you want.
• Be honest on your applications. Insurance companies will investigate your case fully before paying.
• Look for policies that offer discounts or other benefits if you pay your premiums on time.
• Review your policy every few years. Your needs can change periodically, and there may be new policies available that work better for you.
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