Life Insurance

Introduction to buying life insuranceLife insurance, to the responsible adult, is the single most important purchase a family can make, as it is the only way to ensure their financial security. Life insurance protects our families, providing the economic security needed if a head of household were to pass away prematurely. The amount of life insurance needed is best determined from real economic needs, or a human needs analysis. However, many people choose a random figure computed by using a multiple of annual earnings, such as 5 or 10 times earnings.Unfortunately, without having a life insurance policy in place to protect your loved ones, your family could very easily lose their source of income, their home, and the hopes and dreams of providing for the children’s education. They could literally become destitute. Therefore, life insurance is a responsible, caring purchase, benefiting those that you may prematurely leave behind. Without the death benefit paid out by a life insurance policy, life after a provider’s death is uncertain.

When you buy a life insurance policy, you have the option to pay one upfront premium to the insurance company, or pay a premium to the life insurer on a periodic basis to maintain your policy. A life insurance policy pays a death benefit to the policy’s beneficiary.

Life insurance policies can be structured in several ways. A policy can have more than one beneficiary. A death benefit can be paid as either a lump sum or as an annuity, (stream of payments paid monthly, quarterly, or annually). Some types of life insurance build up a cash value, which is considered an asset of the policyholder, and others do not build cash value.

To calculate your premium, the life insurance company compares your life expectancy, to persons in the same segment of the population. They consider your biological age relative to any health conditions that impair your life expectancy. This process of calculating insurance premiums is called underwriting. To help underwrite your policy, a life insurer requires you to complete a health condition questionnaire, and most policies require the insured to complete a medical examination.

If the questionnaire and your medical examination determine that you are a non smoking 45-year old male, you will likely pay a premium that equals that of other non smoking 45- year old males. Naturally, if your health conditions, and/or the mortality rate of persons associated with your occupation, dictate that you are a higher risk to the insurance company than another person of the same gender and the same age, you will pay a higher premium.

There are two main types of life insurance, permanent life insurance and term life insurance. Permanent life insurance provides coverage for the rest of your life, while term life insurance will insure your life for a fixed period of time. Most term life insurance policies are sold for durations of 10 to 30-years terms.

Permanent life insurance options include variable life, universal life, whole life and variable universal life insurance. These various types of life insurance offer different benefits and different premium payment options.

Premiums that you pay into a permanent life insurance policy accumulate a cash value. A portion of your premium payments go towards the cost of the life insurance benefit, while the remaining portion earns interest and accumulates in a cash value. The cash value of the policy can be used as a source of borrowing. The cash value of your life insurance policy is considered a personal asset when you estimate your personal net worth.

Term life insurance policies do not build up cash value. As a result, your policy premium will be less expensive than whole life insurance, and coverage expires if you stop paying premiums. Many make the analogy that when you compare whole life policies to term life policies, it is as if you are comparing the purchase of a home to the renting of a home. When the term comes to an end, like a lease of an apartment, the insurance company may offer you an annual renewable term option along with an annual renewable term price, likely to become quite expensive as you age. Your life insurance premiums can either be fixed (“level premiums”) or variable (“flexible premiums”). With a whole life or variable life insurance policy, your premiums are fixed. With a universal life insurance policy or variable universal life insurance policy, your premium can be flexible. Flexible premiums will allow you to modify the policy’s cash value and/or death benefit as needed.

A term life insurance policy usually charges a level premium for each covered term. However, when your policy term comes to an end, should you inquire about renewing your policy, you should expect to pay a substantially higher premium, as you would be older than you were when you originally applied for the policy. Your older age will obviously impact your life expectancy, and possibly your health. You may be able to lower your cost by completing a current medical exam reflecting your current state of health. Most term life insurance policies offer an option to convert the term policy to permanent life insurance. You may want to consider such a strategy, if you have life-long needs.

To estimate how much life insurance you may need, see the following calculator: click here.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.