| The
main reason for life insurance is to provide income
replacement to your
beneficiaries if you die. But if you are interested
in estate planning, cash
accumulation, wealth transfer, and estate tax liquidity,
life insurance can
also help you achieve these goals. Life
insurance policies are now available from more than
2,000 life insurance companies in
the U.S., as well as from financial institutions that
are now
getting into the marketplace. Because it's just as
important to
understand the companies behind the products as it
is to understand the
products themselves, Insure.com carries company
ratings from Standard & Poor's and Duff & Phelps
to help you monitor the financial
strength of individual insurers. This is especially
important when you're buying life
insurance, because policies will probably pay out many
years from now, maybe even
decades
from now. Therefore, you'll want to know whether the
company you're
buying from will be solvent down the road. Assessing
Your Life Insurance Needs
To determine how much coverage you need, you can check out our coverage worksheet
and learn what to ask your agent.
The main types of life
insurance on the market today fall into two categories: term and permanent. Put
simply, term life insurance provides death-benefit
protection for a
specified period of time (for instance, you might buy
a policy that has to be renewed in two
years). Generally speaking, if you're looking for coverage
for a short period of time, term
life makes more sense. But
if you are looking to have a policy for the rest of
your life, or have investment goals,
permanent insurance is a better fit. All life insurance
policies will require that you meet
certain medical criteria. Term Life Insurance
Non-Guaranteed
Term Life
Non-Guaranteed
term life provides coverage only for a short time (usually
a year) and is
pure death-benefit protection. The risk with term life
is that your health might deteriorate
and you could be unable to get another policy once
the term is up. Premiums can also
increase dramatically as you age, but term life insurance
is usually a good choice for young
people who can't afford the higher expense of permanent
insurance, or for people covering
specific needs that will disappear in time, such as a car loan or a mortgage. Yearly
Renewable and Convertible Term
Yearly
renewable term insurance offers a longer term, usually
for five, 10, or 20 years. By
buying a longer term policy, your costs can be stretched
out to avoid the annual increases
found in non-guaranteed term life. Convertible
term is like yearly renewable term but it also offers
conversion to a permanent
policy in the future — when regular term premiums
might become cost-prohibitive or if
your health declines. Convertible term policies usually
provide the maximum protection with
the smallest amount of cash outlay required. This is
a good choice especially for young
people who are unable to afford the higher cost of
permanent insurance right now but need
maximum life insurance and also want to have the option
of converting to permanent coverage
in the future. Permanent Life Insurance
Whole
Life or Ordinary Life
Similar
to yearly renewable term and convertible term, whole
life policies stretch
the cost of insurance out over a longer period of time
in order to level out the
otherwise increasing cost of insurance. In this case,
however, it is spread
not over a few years but over your entire life. Your
excess premium dollars
are invested in the company's general portfolio. Because
you aren't personally managing that
investment, your selection of an insurance company is vitally important. With
this type of policy, however, the inflexibility of
premium payments could become a
burden if your expenses increase or if you lose your job. Universal
Life
This
option offers greater flexibility than whole or term
life. After your
initial payment, you can reduce or increase the amount
of your death benefit
(although to increase the amount, you'll probably have
to give the insurance
company medical proof that you are still in good health).
Also, after your
initial payment, you can pay premiums any time, in
almost any amount within
the policy's required minimums and maximums. You
will need to actively manage these policies to maintain
sufficient funding, especially
because the insurance company can increase charges
(like mortality and expenses). Plus, part
of your premium is invested by your insurance company,
so you'll need to be careful when
choosing a company. Variable Life
There
are both Universal and Whole Life versions of Variable
Life. This option provides death benefits and cash
values that fluctuate with the
performance of the insurance company's portfolio of
investments (you'll receive a
prospectus along with your policy). The cash value
is not guaranteed, but you
get to choose where your premium dollars go among the
variety of investments
in the portfolio. Thus, while there is no guaranteed
cash value, you have control
over your money and can invest it according to your own tolerance for risk. |
Additional Resources
In the United States: National Insurance Consumer Helpline (NICH)
1-800-942-4242In
Canada: Canadian Life and Health Insurance Association Inc. (CHLIA)
1-800-268-8099
(English)
1-800-361-8070 (French)
|
If
your investments perform well, you'll have a higher
cash value and death benefit. If they
don't, you'll have a lower cash value and death benefit,
although some policies guarantee a
minimum death benefit. You
can also take loans against the cash value of your
policy, but if you don't pay them
back with interest, your beneficiaries will receive
a reduced death benefit. You can also
surrender your policy for cash or convert it into an
annuity, but keep in mind that cashing
in a permanent policy after only a couple of years
is an expensive way to get insurance
protection for a short time. Look
closely at the underlying funds a company offers: Are
they well-balanced? Do they give
you a range of choices to satisfy all risk tolerances? By
Heidi St.
Jean |