What Type of Life Insurance Should I Purchase?
Choosing
the right type of life insurance is a very personal decision. The
challenge lies in finding a policy that meets your insurance needs without
costing too much.
When you choose a life insurance policy, various
factors enter into the equation, including:
·
your current life situation (dependents, mortgage, etc.),
· the amount of coverage you need,
· the amount of money you want to spend, and
· the length of time you need the coverage to continue.
Is
there a simple answer? Sometimes. Before you decide what type of insurance
to buy, you should first determine
how much insurance coverage you need. In some cases, the choice
may be made for you. Your insurance need may be so large that the only
way you can afford to meet it is by purchasing lower-premium term insurance.
Alternatively, you might discover that your need is small enough not
to warrant paying higher premiums for cash value insurance. Or you may
fall somewhere in the middle, where you can afford to purchase either
term or cash value insurance, and the premiums for each seem reasonable
in relation to the amount of coverage you need. In this case, you should
take some time to compare the benefits and drawbacks of term and cash
value life insurance, in order to determine which type best suits your
needs.
Term
Insurance
Term insurance is often referred to as "pure
insurance." Term policies provide life insurance coverage for a
specified period of time. Typically, you can buy term insurance for
periods ranging from 1 to 30 years. If you die during the policy period,
your beneficiary receives the policy death benefit. If you don't die
during the term, your beneficiary receives nothing. At the end of the
specified policy term, your coverage simply ends. You may be able to
renew your policy without a physical exam. Once you reach a certain
age (usually 65 or 70), you may find it difficult to get term insurance
coverage for more than one year--and the premiums will be expensive.
You may also find it difficult to get term insurance coverage if you
develop a medical condition. There are several variations of term life
insurance, including "level" term and "decreasing"
term.
Cash Value Insurance
Cash value insurance (often called "permanent
insurance") combines death benefits with a savings component (the
cash value). As long as you continue paying your premiums, cash value
life insurance continues throughout your life, regardless of your age
or your health. As you pay your premiums, a portion of each payment
is set aside to create the cash value. During the early years of the
policy, the cash value contribution is a large portion of each premium
payment. As you get older, the true cost of your insurance increases,
so the portion of your premium payment devoted to the cash value decreases.
The insurance company typically invests the cash value, which continues
to grow--tax-deferred--as long as the policy is in force. You can borrow
against the cash value, but unpaid policy loans will reduce the death
benefit received by your beneficiary. If you surrender the policy before
you die (i.e., cancel your coverage), you may be entitled to receive
some or all of the cash value.
Whole Life Insurance
Life insurance that is kept in force for a person's whole life as long
as the scheduled premiums are maintained. All Whole Life policies build
up cash values. Most Whole Life policies are guaranteed as long as the
scheduled premiums are maintained. The variable in a whole life policy
is the dividend which could vary depending on how well the insurance
is doing. If the company is doing well and the policies are not experiencing
a higher mortality than projected, premiums are paid back to the policyholder
in the form of dividends. Policyholders can use the cash from dividends
in many ways. The three main uses are: It can be used to lower or vanish
premiums, it can be used to purchase more insurance or it can be used
to pay for term insurance.
Other variations of cash value insurance are the following:
Variable Life Insurance
Universal Life Insurance
Variable Universal Life
Making a choice
Term insurance coverage typically costs less than cash value insurance
coverage. However, the cost of obtaining a term insurance policy increases
as you get older and if your health deteriorates. In contrast, these
factors are taken into consideration when cash value insurance premiums
are set. As a result, certain cash value premiums typically remain the
same throughout the life of the policy. So although term insurance is
typically cheaper during your younger years, the cost may eventually
exceed that of cash value if you continue to renew your term policy.
Still, for most people term insurance is an appropriate choice. In reality,
most people have a relatively short-term need for life insurance--no
more than about 20 years. You certainly want to provide for your family
in the event of your death, but once the nest is empty there is probably
less need for a large insurance policy. The savings aspect of cash value
life insurance also becomes less attractive when you consider that you
could just as easily buy term insurance and invest the savings from
your lower premium payments. It is possible that the after-tax return
on your investment could exceed the tax-deferred return on the cash
value investment. Of course this is not to say that term insurance is
right for everyone. Cash value insurance may be worth your consideration
if the cost is not prohibitive, especially if you are starting a family
later in life, if you fear your health could deteriorate, or if you're
not comfortable investing money on your own in individual stocks or
mutual funds.
