|A LIFE INSURANCE CONSULTATION
Which type of life insurance to choose
OKAY -- LET'S BE AS HONEST AS POSSIBLE...If you don’t have life insurance, you are putting your family’s future at risk. Everybody is mortal. What would happen with people who depend on your financial support if you died? Who would take care of your children? If your family is relying on your income, they could get into a serious financial trouble. The situation could become worse if you have debts or mortgage claims on your house. You CAN protect them, even after your gone.
For most people, life insurance is the only way to protect their families from severe financial hardships in case of their death. This coverage was designed to provide dependents with necessary financial support they would lose. With life insurance, your spouse and children can continue living in their house and maintaining their current style of life. Of course, if you are young and don’t have a family, life insurance might not seem important for you. However, keep in mind that the longer you wait to purchase a policy, the more it will cost. Just compare: the annual premium on a $500,000 life insurance for a healthy, nonsmoking 45-year-old male might be about $550. The same policy for a healthy, nonsmoking man, aged 25, might cost about $250 per year.
Basically, life insurance is a contract between the policy owner and the insurer. The policy owner agrees to pay a specified amount called a premium at regular intervals. In return, the insurer agrees to pay out the face amount to the beneficiaries upon the occurrence of the insured individual's death.
There is a difference between the insured and the policy owner, even though they are often the same person. For example, if you insure your own life, you will be both the policy owner and the insured. But if you decide to insure your spouse, you will be the policy owner and the spouse will be the insured. It is the policy owner who pays for the policy.
Life insurance companies offer numerous types of life insurance, for example universal life policy, a one-year renewable term policy, irreplaceable life policy, mortgage insurance policy, the Champion, etc. However, they are just variations of two basic kinds of coverage: term insurance and permanent insurance.
Term life insurance
Term life insurance, just as its name suggests, exists for a fixed period of time – typically, for 1, 5, 10, 15, 20, or 30 years. Unless renewed, it ends when the term of the policy expires. If the insured dies before the term expires, the beneficiary receives a payout. If the insured does not die before the term is over, the beneficiary will not receive anything. Term insurance is very popular because it is cheap. For example, if you are a healthy nonsmoker 35-year-old male, you will need to pay just a few hundreds of dollars per year for $250,000 worth of coverage.
There are three main factors in term insurance: face amount, or face value (the amount that will be paid in the event of the insured's death), premiums (how much you need to pay for your coverage), and length of coverage (term).
Insurance companies sell term life insurance with various combinations of these parameters. For example, the face amount can remain constant or decline. Or you can be insured for 10 or 25 years.
Term life insurance can be divided into several groups. They are:
Permanent life insurance
Permanent life insurance, also known as cash value insurance, provides lifetime coverage. In its basic form, the premium remains constant as long as you keep the policy. A portion of your premiums and the interest it earns go into a cash reserve fund. You can access this money, called cash value by:
If you die, the insurance company pays your beneficiary the face amount, not the face amount plus cash value.
There are several types of permanent life insurance you can choose from. Their main differences are in the investment options and the premium amount.
Whole life insurance is probably the most common type of permanent insurance. It combines life coverage with an investment fund. Whole life insurance pays a fixed amount on your death, and part of your premium goes toward building cash value. The insurance company invests your cash reserve fund and pays you dividends.
Universal or adjustable life insurance offers you more flexibility than whole life insurance. It combines permanent insurance with a money market-type investment that pays a market rate of return. The investment choices usually include some type of equity investments, which may make your cash value grow quicker.
After money has accumulated in your cash reserve fund, you will have the option of changing your premium payments (however, they are subject to certain minimums or maximums). This can be a useful feature if your financial situation has suddenly changed.
Variable life insurance provides different investment options, which are typically professionally managed. You can use cash value you have accumulated to invest in stocks, bonds, and money market mutual funds to earn a greater return. Good investment performance will lead to higher cash values and death benefits. Of course, there is always the risk of losing your money through these investments too. Luckily, some policies guarantee that death benefits will not fall below some minimum amount.
Variable universal life insurance combines variable and universal policies. Like variable policies, you have different investment options for your money and the risk that comes with them. Similar to universal life insurance plans, you can change your premium amounts and death benefit if your cash value can cover the difference.
What type of insurance should you buy?
What to choose – permanent or term policy? This question has always caused long heated discussions. One of the strongest arguments for permanent life policy is the cash value. It could boost your financial resources as the years pass.
Just imagine: a $250,000 permanent life policy bought at age 35 could accumulate a cash surrender value of $100,000 by the time you reach age 65. It is a nice addition to your retirement fund if you decide to terminate the coverage. The income is tax free unless the cash value exceeds the premium amount you have paid. On the other hand, you can't receive the cash unless you surrender the policy (that means to turn in your policy) or borrow a portion of it. So why shall you give that money to the insurance company if you can purchase term insurance and invest the difference yourself?
If you want to borrow against your cash value, it will keep the policy in force. It is even not necessary to pay off your debt. However, any unpaid balance will be deducted from the face value paid to your beneficiaries in the even of your death. If you want to restore the full face value of the policy, you need to eliminate your debt, including interest. What interest will you pay? Some companies collect a variable APR so that the interest they charge reflects the current financial environment. Other insurance companies reduce their dividends, so the more you borrow the less your fund will earn. This approach is called direct recognition. In any case, you can leave the both insurance options open by starting with a term policy that you can convert to permanent coverage.
Get the best rate on life insurance
If you need to find the best insurance rates, there is only one way to do it – compare the deals! Insurance companies have their own policies and guidelines, so their premiums will significantly vary even for the same type of coverage. That's why it makes sense to shop and compare prices from multiple companies.
Keep in mind that your insurance costs will depend on several factors. First of all, you need to figure out how much life insurance you need. As we have already mentioned, the main purpose of life insurance is to provide your dependants with financial support. So you need enough insurance to replace 5-7 years of your salary. If you have small children or heavy debts, your insurance should replace about 10 years of your salary.
Decide what type of life insurance suits you more. Maybe you want to buy just one-year renewable term coverage and then look for better rates. Or you would rather apply for variable insurance because of its investment options? Buying a policy that will expire before you need it is similar to wasting your money. When you apply for life insurance coverage, you will have to answer a lot of questions and undergo a medical test. It helps insurance companies determine how much of a risk you are to insure. Typically, the insurers consider the following factors:
Your age and gender. The younger you are, the less your policy will cost. And women usually get lower rates because they live longer (it lets insurance companies collect more premiums before making a payout). Your smoking habits. If you smoke, it can be a strike against you. Keep in mind that a 45-year-old cigarette smoker will pay triple the rate of a non-smoker! Your health. As you understand, people with good health live longer. So if you have high cholesterol, be ready to pay more. However, insurance companies consider asthma, diabetes and most digestive disorders as minor problems if you are getting good medical care. Your height and weight ratio. It is a well-known fact that obesity has a serious impact on your health conditions. That’s why insurance companies consider your height and weight ratio. For example, a 6-foot, 205-pound man can get a better rate than a 6-foot, 220-pound man. Your occupation. Some types of job may be considered as very risky. For example, if you are a miner, it maybe difficult to get cheap life insurance. Your hobbies. People who are fond of extreme sports can expect to pay more for their coverage. So if you like car racing or bungee jumping in your free time, you will have to pay a higher premium for life insurance. Your travel plans. Insurance companies often want to know if you are going to visit risky parts of the planet. If you have plans to visit Iraq or Afghanistan, don’t expect to get a good rate on life insurance. Your credit score. Nowadays your credit score plays a significant role for insurance companies. It shows how financially responsible you are. So if you have defaults or a bankruptcy in the past, expect to pay more for life insurance.