Learning the Basics

The best way to make an informed decision about buying life insurance is to become familiar with the basics. There are three life insurance basics that all consumers should consider:

1. Start by considering how many people are financially dependent on you, what their major expenses are likely to be and whether you’re likely to leave them with substantial debts or taxes to pay on your estate. Life insurance can help on all of those fronts.
2. Evaluate the two main types of life insurance: term and permanent. As its name implies, term life insurance pays a death benefit if you pass away within a specified time period. Permanent life insurance lasts your lifetime and also has the ability to build up cash value during the term of the policy.
3. Understand the major factors that can affect life insurance premiums. Some are uncontrollable, like the age at which one purchases a policy or a serious pre-existing medical condition, like cancer or heart disease. Other factors are much more dependent on an individual’s behavior, like poor health habits (e.g., smoking and excessive drinking), driving record (e.g., accidents and Driving While Intoxicated citations), engaging in dangerous hobbies (e.g., sky diving, car racing or rock climbing) and even where one lives, since mortality rates in a geographic region may be used by life insurance companies to help establish premiums.

An important feature of life insurance is that there is no federal income tax on proceeds paid to beneficiaries.

How much life insurance do I need?

Before buying life insurance, you should assemble personal financial information and review your family's needs. Factors to consider include:

• Any immediate needs at the time of death, such as final illness expenses, burial costs and estate taxes;
• Funds for a readjustment period, to finance a move or to provide time for family members to find a job; and
• Ongoing financial needs, such as monthly bills and expenses, day care costs, college tuition or retirement.

One rule of thumb is to buy life insurance that is equal to several times your annual gross income, to allow your family the ability to continue their lifestyle for several years without hardship.

If you need to stop paying premiums, you may be able to use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live.  Usually, you may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.

What are the advantages and disadvantages of term and permanent insurance?

Term Insurance

Advantages

• Initially, premiums are generally lower, allowing you to buy larger amounts of insurance at a younger age when the need for protection often is greatest due to debt.
• Good for covering specific needs that will disappear in time, such as mortgages or car loans.

Disadvantages

• Premiums increase as you grow older.
• Coverage may terminate at the end of the term or may become too expensive to continue.
• Generally, the policy doesn't offer cash value or paid-up insurance.

Permanent Insurance

Advantages

• As long as the necessary premiums are paid, the policy will last your lifetime, or age 95 or 100, whichever is stated.
• Policy accumulates cash value that you can borrow against, or withdraw if needed.
• A provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence or insurability.
• Premiums never change during the life of the policy.

Disadvantages

• Higher premiums than term insurance which may not be as affordable.
• It may be more costly than term insurance if you don't keep it long enough.