Fast Life Insurance Basics

Calculate your life insurance needs

The first step in buying life insurance is to figure out if and how much you need — determine economic needs of dependents if you aren't there:

Measure your standard of living now and what you want to maintain for your dependents. Plus add medical bills and funeral costs. Your family may have to relocate if you die if there are not resources to pay the bills.
Don't forget to add all the financial needs of family members like children's expenses, income replacement, mortgage payoffs or rent, college education, daycare, taxes, etc.

Since life insurance needs change, you should review your amounts every five years or when there is a major life change in income or assets, marriage, divorce, birth or adoption of a child, or major purchase like a house or business.

Life insurance needs should decline oneed for as you age because fewer people remain dependent upon you for income support. Exceptions would be protecting a over time since the mortgage gets paid down and kids growup and leave the house. Life insurance can also go to pay estate taxes, then you’ll need whole life insurance, which goes longer than term.

Types of Life Policies

Life insurance policies are divided into two main types:

Term life gives you a death benefit without biulding cash value, so it's the least expensive cost.
Whole life insurance builds cash value which can be complex and expensive.

Term Life Insurance

Term life is often sold as level premium and if available for 10-30 years. With renewable term, your policy renews and premiums increase each 1-5 years. Choose level premium term if you want to take out the guessing and want your premium to stay the same. There is also a product called decreasing term where premiums stay the same but your death benefit goes down over time. Very cheap and useful if you want to pay off something that gets paid down, like a mortgage or business loan.

Term life insurance is a popular because it's cheap but when the term expires, you'll have to shop for a new policy, priced according to your age and health.

Match the period of time your dependents need your income to the available rate-guarantee periods. For example, if your children are young and you have decades to go on your mortgage, try 30-year term life. If your children are leaving the nest and your home is paid off or nearly paid off, 10-year term might fit the bill.

Whole Life Insurance

Whole life insurance is permanent (to age 100) with a cash value account that grows slowly. Whole life provides a level death benefit and level premiums. You can withdraw your cash value or take out a loan against it, but remember, if you die before you pay back the loan, the death benefit paid to your beneficiaries will be reduced. If you have a whole life policy, your beneficiaries receive only the death benefit no matter how much cash value you've built up. Other possible options available (along with higher premiums) are:

Death benefit plus cash value
Death benefit plus return of premium

Whole life insurance is participating or nonparticipating.

Participating policies typically cost more but may return annual dividends if the insurer has a good financial year. Dividends are not guaranteed.
Nonparticipating whole life insurance offers no dividends.

Buyers of whole life insurance like fixed premiums and death benefit to age 100.

Universal Life Insurance

UL offers greater flexibility (and more complexity) than whole or term life. After your first payment, you can change your death benefit and pay premiums any time and in any amount, as long as you don’t miss a minimum amount. There may be limits to how much extra you can pay in advance. If you choose to increase your death benefit, you may have to provide medical information you are in the same health class.

Universal life policies can set up to provide level death benefits and premiums that are guaranteed until age 100.

Variable Life Insurance

Variable life pays a death benefit with plus an investment account. The insurance company "invests" your premiums and offers you a selection of acocunts in risk your money in. Returns cannot be guaranteed. The amount of money your beneficiaries will receive and the cash value of your policy depend on how much the investments grow. If the cash value drops to nothing, the policy will end. It is possible to get a minimum death benefit with some variable life policies.

Life Insurance