Why do people buy Life Insurance?
While this question may seem like it has an obvious answer, many people wait too long to purchase life insurance and then can only afford enough to pay final expenses. At that point, they think of it—more appropriately, perhaps—as burial insurance.The real purpose of life insurance, however, is to ensure that the people you love will be able to go on living—without undue hardship—in the event of your untimely death. It takes a spouse about three years to recover financially, rearranging bills and adjusting to one paycheck, after a partner dies. If children are involved, the adjustment takes an average of five years if both partners had received an income. If one parent had a lower income or had been staying at home to raise the children, that individual will have to go out and find work. The work is often service work of an unskilled nature. Thus, his/her income will need to be supplemented at least until the children are grown.
People who have significant wealth to the point that life insurance is not a necessity often purchase life insurance as a legacy, intending for the proceeds to benefit a charity or provide an education for grandchildren. It can also provide a means of keeping a business going if the key person dies, or a way for heirs to pay taxes on a large estate.
Owning enough life insurance to completely provide for your family may sound like an impossibility. However, with the right kind of policy and thoughtful financial planning, it isn't as difficult as you may think.
What are the different types of life insurance?
Life insurance comes in three basic types, whole life, universal life—also known as UL—and Term. Each of those types has multiple modifications, depending on the company. Thus, while we can educate you here, it is still important to work directly with a licensed representative of a company of your choice. The company is not legally responsible if you purchase a contract that contains clauses you did not understand. It is your responsibility to understand the type of insurance you purchase as well as any particular variations created by the company.
Which type of insurance is the most common?
The insurance most often purchased, particularly by people between the ages of 20 and 40, is Term insurance. Just as the name suggests, it is coverage for a specified term or time period, usually 20 years. It is very inexpensive and yet is available at high face values.
What is Universal Life?
Universal life insurance is a type of life insurance that builds a savings plan out of which your premium is paid. It is commonly known as “flexible” life insurance because you can change the premium or face value, although you usually have to prove insurability if you want to increase the face value. The interest it accumulates can also fluctuate with the economy, so if you start with an unusually high interest, you may find it necessary in future years to increase your premium slightly to keep the policy in force.
What is Whole Life?
Whole life, like term, is exactly what it sounds like. A policy without company specific modifications will have a level premium and level face value for your entire life. Unlike Term, however, whole life builds a cash value which you can claim if, in later years, you decide that you no longer need the life insurance.
How type of life insurance is best for me and my family?
The type of insurance you need depends both on your current needs and on your future goals. If you are putting money aside for retirement and have plans in place for final expenses, you may only need a policy that would provide for your family while the children are young. In that case, a Term policy would be fine. If, however, you want some choices in the future, including the possibility of cash that can be added to your retirement assets, you should consider a Universal or Whole Life.
What type of life insurance is least expensive?
Again, that depends on your goals. If you know that you will not need life insurance in later years, a term will be the least expensive. However, if you find that you need to purchase a universal or whole life just as you are about to retire, you will quickly discover that the combination of Term premiums for 20 years and whole life for the remainder of your life will be more expensive than if you had simply purchased whole life in the first place.
How can I be sure I make the correct choice for me?
Life insurance language is not standardized, and companies create their own variations of the different types. The best way to make sure you purchase something that will give you long term peace of mind is to work with a reputable agent who can explain exactly what a policy will do for you.