Life Insurance – The Basics

Provided By InsWeb
by Michelle Martin, InsWeb

Most people buy life insurance to replace income that would be lost if a wage earner passed away. Life insurance proceeds are tax-free, so it can also play a role in estate planning, cash accumulation, retirement funding, and the transfer of wealth to beneficiaries.

There are quite a few types of life insurance on the market today. The cost of a policy and the features it offers can vary tremendously depending on the type of insurance you choose. Here’s a rundown of the major types of life insurance. (There are also differences between insurance companies. For example, not all companies will charge the same price for the same type of policy. So it’s good to shop around.)

Term Life Insurance

Term life insurance covers you for a period of time you select (for example, 10 or 20 years) and pays benefits only if you die during the time you’re covered. Term life is often referred to as temporary insurance. These policies do not accumulate cash value, which means if you do not die within the time you’re covered, your estate does not collect any money from the policy when it ends. However, most companies offer conversion privileges to permanent policies, which means you can turn your term life policy into a “permanent” one under some circumstances. With permanent policies, a portion of your premium goes to building cash value with interest.

Benefits of term life policies:

  • They cost less than permanent insurance.
    Proceeds are not taxable to your beneficiaries.
  • They supplement employer-sponsored life plans, or older policies that may be inadequate due to inflation.
  • While in effect, you typically can convert to a permanent policy without evidence of insurability (that’s an official statement proving you’re an insurable risk).
  • You can buy a large amount of term insurance to complement your permanent policy.

Permanent Life Insurance

Permanent life insurance provides lifetime protection, and lets you build cash value over time. You can use your cash value to take out a loan for emergencies, fund a major purchase, or send children to college.  Permanent life insurance policies are known by a variety of names: whole, ordinary, universal, adjustable and variable life.

Benefits of permanent life insurance:

Premiums remain constant over your lifetime.

Death benefits will be paid when you die. Also, some insurance companies will advance death benefits to pay for nursing care or terminal illness expenses. (These features are also available for some term life policies).

You can accumulate cash value, tax deferred.

You can withdraw or borrow accumulated cash value.

Whatever type of policy you decide on, life insurance is a long-term commitment. Before buying, ask yourself a few questions:

  • How much insurance do I need? What would my dependents need to live comfortably if I died? How much can I afford to pay for a policy?
  • Do I want life insurance to do more than replace income? Am I looking for ways to fund future education costs, to pay estate taxes, to supplement retirement or handle emergencies?
  • Is the life insurance company I am considering financially secure? How is the company rated by industry experts? Does the company have a good claims payment history and competitive prices?