Insurance is, by definition, a contract which protects property or persons against damage or loss. In our society, the most common property protected by insurance is homes, cars, and businesses. However, we have an opportunity to protect the one thing that means the most- human life.
There are many reasons that people choose to insure their life-
– To replace lost income from the primary wage earner, providing financial relief for a surviving spouse.
– To pay off current debts, so if the person were to die, their debts would not be transferred to the responsibility of their family.
– To pay for funeral expenses at the time of death.
– To provide for children in a way that they would if the insured person were still alive, such as paying for college, vehicles, or down payments on houses.
Whatever the reason, when a person decides to buy a life insurance policy, they must decide what type to buy. The most common advice that an insurance agent will give is to purchase as much life insurance as possible, as young as possible. The reason for this is life insurance gets more expensive to purchase as the person gets older. If at a young age a person can determine how much insurance they may need, they will pay a lower premium for that same amount of insurance than a person even 5 or 10 years older than them would pay.
To determine how much life insurance to purchase, it is important to decide what the reasons are for buying life insurance, and therefore how much life insurance is desired. With a $300,000 mortgage on a home, with 3 young kids to care for, there might be a need for $400,000 or $500,000 of life insurance for the next 30 years (or until the home loan would be paid off), but then simply $200,000 of life insurance over 30 years from now. It is possible to satisfy this varying need with different life insurance products.
What types of life insurance are available?
Although there are hundreds of life insurance policies available for purchase, there are 2 basic types of life insurance that policies fall into to be familiar with: Term Life Insurance, and Whole Life Insurance. For many people, it is ideal to purchase some amount of both types of policies.
Term Life Insurance
A “Term Life Insurance” policy provides the policy owner with protection for a predetermined term. The policy may be purchased for a term of 5 years, 10 years, 20 years, or 30 years. A Term Life policy is the least expensive type of policy.
The amount of insurance desired is chosen, and premiums are paid for the term decided. If the insured is to die within the years of the term, the amount of insurance purchased is paid out to a beneficiary, or the person chosen to receive the money. If the insured does not die during the term, no money is paid out, and the policy ends. (In many cases, insurance companies offer to continue the term longer, but usually with a higher premium due to the increased age at that time).
As the least expensive type of policy, a Term Life policy may be ideal for an amount of $300,000 for 30 years, to cover the risk of the home mortgage being paid on for those 30 years. Ideally, after 30 years, the home would be paid off and no longer poses a financial risk to the family, and the life insurance to cover that risk would no longer be needed.
Whole Life Insurance
There are many types of Whole Life Insurance policies available, but the one thing they all have in common is the policy lasts until the insured dies, without any specified “term.” As long as the policy is being paid for monthly or annually, the policy will stay in force until the person dies. Because of its benefits, a Whole Life policy is more expensive than a Term Life policy.
A Whole Life policy is usually purchased for a smaller amount of insurance than a Term Life policy. A Whole Life policy may be intended to cover funeral costs, or to provide some financial support for a surviving spouse and children.
Whole Life policies may be available with the following benefits:
– The amount of premium paid for the policy monthly or annually will be “locked in” for as long as the insured keeps the policy active, or until death. Therefore, a younger person who purchases a Whole Life policy can take advantage of much lower premiums for their entire life!
– A “cash value” may be built up over time, providing an amount of money that would be available back to the insured for a loan, or money that could be “cashed out” upon cancellation of the policy.
– A “Variable” Whole Life policy allows for a portion of the money paid in premiums to be invested by the insurance company, creating a fluctuating death benefit amount that would be paid out to the beneficiary.
– A “Universal” Whole Life policy also allows a portion of the money paid in premiums to be invested. The money is invested at a variable rate, and the cash value of the policy grows at that rate. With a positive return over time, it is possible for the cash value of the policy to far exceed the death benefit of the policy.
Many people find buying life insurance uncomfortable, or something they would rather not discuss. Buying life insurance should be a part of every family’s budget for asset protection and wealth management. However uncomfortable as it may seem, as death is an unavoidable certainty, buying life insurance should not be avoided, but rather looked at as an opportunity to protect the most important aspect of any family- life.