There are two primary types of insurance: permanent life and term life
insurance. Each provides specific types of protection for your loved
ones.
Term life insurance, the simplest form of life insurance, is designed to
protect your family for a specified length of time or “term.” Term
policies, which range from 1 to thirty years, provide a one-time death
benefit but no cash savings. This means term policies only provide
benefits as long as the insured has paid the premium, which is the cost
of the insurance. Premiums are divided into equal monthly payments that
are assessed for the entire period of coverage. If you bought a policy
that covered you for a three-year term, then you would make 36 equal
premium payments on that policy.
Permanent insurance is designed to offer both a death benefit and an
investment return after a length of time. Because this type of insurance
offers a long-term savings plan, premiums are higher than those for term
life insurance. Common types of permanent insurance are whole life,
universal life, and variable universal life.
Term vs. Permanent
Term life insurance is especially appropriate for those who desire
coverage for a specific length of time and who have limited funds.
Because it is less expensive than permanent insurance, term can offer
more coverage for less money. This is useful to people who have
children, mortgages, and various types of loans. The right amount of
term can cover these expenses and more. However, if you still desire
coverage after a term policy’s period ends, factors such as poor health
and age will result in higher premiums when you buy a new policy.
Permanent insurance, although more expensive, allows policyholders
various benefits, including a premium that will not change as you age or
if your health deteriorates. Also, permanent insurance will usually
accrue monetary value, offering the policyholder a return on their
investment that they can access as worth builds.
Whole or ordinary life is the most common form of permanent insurance.
With whole life your premiums and the face amount of the policy are
fixed over the life of the policy. Your premiums must be paid regularly.
A more flexible policy, where you can pay premiums at any time in just
about any amount, is universal life. With this kind of coverage, you’re
allowed to modify the death benefit amount according to your needs.
A variable life policy carries both a death benefit and monetary value.
The value of this policy is dependent upon the performance of
investments. You select the investments for your portfolio and the
better they perform the higher the death benefit and cash value of the
policy. Some policies offer a minimum death benefit regardless of how
your portfolio functions.
Variable-universal life carries elements found in both variable and
universal life. You get the risks and possible rewards of a variable
policy and the flexibility of universal coverage.
Choosing a Life Insurance Company and Policy
There are some important things to consider when buying a policy. Be
sure to shop around before buying life insurance. Consumers can buy
insurance directly from an insurance company via the Internet or over
the phone. Buying this way is usually cheaper than going through an
insurance agent because the agent receives a commission, called a
“load,” when they sell a policy.
The life insurance industry is very competitive with hundreds of
companies offering policies. This is a benefit for the consumer, because
competition tends to aid the buyer; however, this can also be seen as a
detriment because the range of choices can make finding the right policy
from the best company daunting. Your search will be easier if you
consider four basic criteria in making your selection—rates, budget,
service, and stability.
Rates: Because it is such a competitive business, life insurance rates
vary greatly from company to company. Find three to five policies with
attractive rates for the amount of coverage you desire.
Budget: Once you’ve found these policies, be sure the premiums are
within your budget. It doesn’t make any sense to go forward with any of
these contracts if you aren’t going to be able to afford them.
Service: In determining the quality of each company’s service, you can
do two things. If you are going through an agent, you’ll be determining
the quality of that person’s service when you talk to them about the
benefits of buying specific policies. The same is true if you buy
directly from an insurance company without going through an agent. Do
they answer your questions clearly? Do they seem to know what they are
talking about? Do they leave out important information?
By considering at least three companies and/or agents, you’ll be able to
compare their ability to answer questions and to give you their
undivided attention. Along with interviewing potential agents and
companies, you can check with your state insurance department to see how
many complaints, if any, they have received concerning the company
and/or agent.
Stability: An insurance company’s economic stability is directly
connected to their ability to meet their future financial obligations.
In other words, you want to make sure an insurance company will be able
to pay your death benefit. The following companies rate insurance
providers’ fiscal soundness.
A.M. Best
Oldwick, New Jersey 08858
908-439-2200
www.ambest.com
Moody’s Investors Services
99 Church Street
New York, New York 10007
212-553-0300
www.moodys.com
Standard & Poor’s Insurance Ratings Service
55 Water Street
New York, New York 10041
212-438-2000
www.standardandpoor.com
Weiss Research
4176 Burns Road
Palm Beach Gardens, Florida 33410
800-289-9222
www.weissratings.com
After going through these four steps you should be able to compare each
company, agent, and policy and make an informed choice.
One more important place to check for affordable life insurance is your
employer. Many businesses offer very competitive group rates, usually
for term life policies.
How Much Life Insurance is Enough?
Some people will say that you can never have enough life insurance.
However a common rule of thumb is to buy at least five times your yearly
income. Many policies include a double indemnity clause, which means
your beneficiaries receive double the value of your death benefit if you
should die suddenly in an accident or due to some violent event.
In asking yourself “how much is enough,” you’ll want to make a list that
includes yearly expenses, large debts (such as a mortgage), and
long-term or future expenses (such as college tuition). You’ll know
you’re adequately covered if your death benefit provides for large
debts, with enough left over for at least one year of living expenses
and for investing or sheltering for long-term or future expenses.
Finally, you need to decide what you want to get out of your life
insurance. Is it simply a specific period of coverage with a large death
benefit or do you want your life insurance to be part of your long range
fiscal planning? Considering and answering all of these questions will
help you find the policy that’s right for you.
