The Basics to Buying Life Insurance

One of the most important types of policies you can buy is a life insurance policy. This type of insurance provides financial protection and peace of mind to your family after you have passed away. Although death is never a pleasant thing to ponder, neither is the idea of leaving your family with serious financial burdens or problems that could have been prevented. Below is information that will make your insurance purchasing decision easier.

Types of Policies

Life insurance policies fall under two umbrellas: term or permanent. Before you make your decision, you need to understand the difference between the two. Term life insurance, as the name suggests, only covers you for a specific amount of time. For example, your policy may only provide coverage for ten years. To receive benefits, your beneficiaries must make their claim during that period. Permanent insurance has no time limit. As long as you are making the premiums, you are going to have your coverage. While that may seem fairly straightforward, permanent coverage comes in a couple of different types.

Types of Permanent Life Insurance

The more traditional permanent policies are known as whole life. These policies have a set premium paid over the life of the coverage and build cash-value over their life. Variable permanent life policies work in much the same way, but you get to decide where your premiums are invested in order to build the cash value of the policy. For example, you could choose to have the premiums invested in stocks so you could generate a higher return on your insurance investment. Finally, you might opt for universal life insurance which gives you some flexibility in setting your premiums and on determining the death benefit for the policy. For example, if you decide to reduce the coverage amount after 20 years because your children are all grown up and most of your debts are paid off then you would have that option.

Pros and Cons of Term Life Insurance

People who choose term life policies do so primarily because they are more affordable. If you want a sizable amount of coverage but have a limited budget, this is your best option. Most of the policies are renewable at the end of each term up until age 65 or 70. However, your premiums will normally increase each time you renew. Some term life policies can be converted into whole life policies so once your financial situation improves and you can afford higher premiums this would be an option. On the down side, the policy does not build cash value so you could end up spending more in premiums then the value of your policy. Also, if no claim is made during the policy period, the premiums are lost and you get no gain, except for peace of mind during that period, for what you’ve spent.

Pros and Cons of Permanent Insurance

The price difference between term and permanent policies is quite large. As a result, you might end up being underinsured if you opt for a permanent policy. On the bright side, as long as you continue making the payments, your coverage cannot be canceled so your family will have guaranteed financial protection. Another benefit is the stable premium. You will always know how much to pay for your premiums because they will stay the same for the life of the policy. Purchasing when you are young and in good health, therefore, will save you a lot of money on your insurance as you get older and your health deteriorates.

Costs of Coverage

The price of your premiums will be determined by a number of factors. As discussed above, the type of policy you choose will have a major impact on how much you will end up paying. Also, your age and health at the time of applying for coverage will be major factors. The underwriters of the policy have risk analysis methods that use to determine whether covering you makes financial sense for the company. If it doesn’t because you are over 50 or have a chronic health problem, such as diabetes, then you’ll pay higher premiums or may be refused coverage altogether. Smoking will also increase your premiums drastically.

Importance of Honesty

Insurance companies go through the life insurance applications thoroughly, even after they have been approved. If any information your provide on that form is deemed false, your policy can be immediately voided and your family will not receive any of the benefits you wanted them to have after you were gone. Because insurance companies do not want to pay those benefits, they will look for loopholes so always complete the application honestly even if you suspect you may be turned down as a result of something you’ve said.

Guaranteed Death Benefit

When you are investigating different policies before choosing your life insurance coverage, be sure to choose one that has guaranteed death benefits. That means the amount of the policy you choose is guaranteed to be the amount paid to your family members. If that is not the case, the death benefit may be less because of changes in interest rates or because of a loss in the investments made with your premiums.

Determining the Coverage Amount

When you choose your coverage amount, you want to pick an amount that will replace your total income for at least one full year. Don’t forget to add extra for funeral and unpaid medical expenses.

March 16, 2009, Posted by Rainy Day Mitch