The main reason for life insurance is to provide income replacement if you die. It can also be used for estate planning, cash accumulation, wealth transfer, and estate tax liquidity.
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Assessing Your Life Insurance Needs
The main types of life insurance on the market today
fall into two categories: term and permanent.
Put simply, term life insurance provides
death-benefit protection for a specified period of
time (for instance, you might buy a policy that has
to be renewed in two years). Generally speaking, if
you're looking for coverage for a short period of
time, term life makes more sense.
But if you are looking to have a policy for the rest
of your life, or have investment goals, permanent
insurance is a better fit. All life insurance
policies will require that you meet certain medical
Term Life Insurance
Yearly Renewable and Convertible Term
Yearly renewable term insurance offers a longer
term, usually for five, 10, or 20 years. By buying a
longer term policy, your costs can be stretched out
to avoid the annual increases found in
non-guaranteed term life.
Convertible term is like yearly renewable term but
it also offers conversion to a permanent policy in
the future - when regular term premiums might become
cost-prohibitive or if your health declines.
Convertible term policies usually provide the
maximum protection with the smallest amount of cash
outlay required. This is a good choice especially
for young people who are unable to afford the higher
cost of permanent insurance right now but need
maximum life insurance and also want to have the
option of converting to permanent coverage in the
Permanent Life Insurance
Whole Life or Ordinary Life
Similar to yearly renewable term and convertible
term, whole life policies stretch the cost of
insurance out over a longer period of time in order
to level out the otherwise increasing cost of
insurance. In this case, however, it is spread not
over a few years but over your entire life. Your
excess premium dollars are invested in the company's
general portfolio. Because you aren't personally
managing that investment, your selection of an
insurance company is vitally important.
With this type of policy, however, the inflexibility
of premium payments could become a burden if your
expenses increase or if you lose your job.
This option offers greater flexibility than whole or
term life. After your initial payment, you can
reduce or increase the amount of your death benefit
(although to increase the amount, you'll probably
have to give the insurance company medical proof
that you are still in good health). Also, after your
initial payment, you can pay premiums any time, in
almost any amount within the policy's required
minimums and maximums.
You will need to actively manage these policies to
maintain sufficient funding, especially because the
insurance company can increase charges (like
mortality and expenses). Plus, part of your premium
is invested by your insurance company, so you'll
need to be careful when choosing a company.