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Types of Life Insurance Available
There are two basic types of life insurance - term and whole life insurance. There are many variations on the types of investments whole life policies offer and how the proceeds from those investments are applied to reduce the premiums or increase the beneficiary benefit. There are several options as to the length of the term of term life insurance policies and options to extend or convert to term policy at the end of the term. The first decision you will have to make when considering life insurance is whether a whole life insurance policy or term insurance policy will best meet your needs and budget.
Difference Between Term and Whole Life Insurance
A term life insurance policy provides insurance on your life and does not include an investment feature. Whole life insurance combines a life insurance policy with an investment component in bonds, money-market investments or stock investments.
Whole life insurance is more expensive than a term policy. The cost of a whole life policy includes the premium which pays for the insurance policy and fees and commissions associated with the investment component of the policy. However, with a whole life policy you also benefit from the dividends and/or interest earned from the investment. The whole life policy builds cash value as the investments grow. You can borrow against the cash value or the policy as well as provide a death benefit to the named beneficiaries.
Premiums for term insurance are relatively inexpensive for those in good health and under age 50. After 50, premiums are more expensive. Some companies do not offer term policies to people over 65. Smokers and those with high risk occupations or lifestyles will pay higher premiums as will those with high risk family health histories. Term life insurance policies with conversion or extension options at the end of the term will cost more than those without these provisions. While the affordability or term life insurance is a plus the downside of term policies that do not include a conversion or extension option at the end of the term are these policies do not provide a payout to your beneficiaries if you outlive the term of the policy. The term policy pays the face amount of the policy upon the death of the insured only if the insured dies before the end of the term.
How Much Life Insurance is enough
Calculating your life insurance needs can be a very complicated task. There are life insurance calculators on the internet that may help you determine how much life insurance is enough to take care of your beneficiaries in the event of your death.
Money Magazine provides a rule of thumb ranging from seven to ten times your annual income as a guideline for how much life insurance you might consider as adequate for your beneficiaries. However, your family could need more or less, depending on your specific situation. For example, the age of your children, if your spouse works outside the home, if your spouse has their own retirement plan and the amount of outstanding debts you owe. If your home is paid for and there are few outstanding debts to pay off after your death a smaller life insurance policy may be sufficient. If your children are grown and have finished college a smaller policy may be sufficient. On the other hand if the outstanding mortgage on your home is substantial and your children have not yet completed college a larger policy may better provide for your beneficiaries in the event of your death.
A couple of the key questions to ask yourself are: What kind of lifestyle and security do you want to provide for your spouse and children if you die? What will be the impact of your death on your family's financial stability? There are different considerations if you are a sole wage-earner and looking to purchase life insurance than if you are a stay at home spouse looking to purchase life insurance to provide the resources to care for your family in the event of your death.
It is important not to spend more time than necessary trying to come up with an exact calculation. Your estimate of how much insurance you need will be - at best - an educated guess. How accurate the estimate is will depend on many external factors like inflation in the cost of living and the return on your investments over which you will have no control. The best you can hope to do is come up with a close approximation of what level of insurance will provide your family with the security you desire for them if you are not around to contribute to their well-being. The idea is to approximate the insurance benefit that will take care of your family without paying more in premiums than you need to pay for insurance benefits in excess of your family's needs or policy options you really need do not require.
Conclusion: Chose Your Insurance Policy and Insurance Carrier Carefully
Whatever type of life insurance and whatever the amount of insurance you decide to purchase do not purchase insurance from an insurer which is rated less the "A" by Standard and Poor's.
You do not want to pay your premiums for years only to have the insurer become insolvent before your beneficiaries can collect on the policy. That would be the worst case scenario.
The key to determining the best life insurance policy for your specific needs is to shop around, obtain several policy quotes and read the policy proposals carefully. You want to be comfortable the policy you choose has the terms and conditions that you are looking for and offers the benefits you desire at a price you can afford. You want to be confident the insurer you choose will be able to deliver to your beneficiaries the amount of the benefit your premiums have paid for over the years.
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