Friday, March 14, 2014

Life Insurance: the very basics.


What is Life Insurance:

Life Insurance is an insurance policy that pays the beneficiary money (death benefit) after the insured dies.

There are two basic types of Life Insurance: Term Life and Whole Life. Over the years insurance carriers have introduced modified policies - Universal Life, Indexed Life, etc. This is not meant to be a comprehensive tutorial, I am sticking to the basics.

Why should I buy life insurance?

Keep this in mind;  Life Insurance is not purchased for benefit of the insured, it is purchased to provide financial assistance and security for your loved ones after you die.
To pay for funeral and end of life medical expenses
To pay off debt
To provide money to raise children/ provide for their education
To pay estate taxes
Guarantee Insurability
Etc.

What is Term Life Insurance:

Term Life Insurance is like renting an apartment - you sign a lease - during the term of the lease as long as you pay the "rent" you get to "live in the apartment" - when the lease is up, the landlord can increase the rent and if you don't like it you move on...
Here is an example: you purchase a 20 yr $100,000 death benefit policy for $550 a year - as long as you pay the premium (rent) the insurance company (landlord) agrees to pay your beneficiary $100,000 after you die (apartment.) At the end of 20 years the insurance company (landlord) can increase the premium (rent), if you don't want to pay the premium the policy ends (you move.)
Term Life is often used as a temporary needs insurance. The kids will be gone in 20 years so you only need the death benefit until they are out on their own, the house will be paid for in 30 years, etc.

What is Whole Life Insurance:

Whole Life Insurance is like purchasing a home - you take out a mortgage and make your payments for the life of the mortgage and when the mortgage is paid off, you own your home.
Here is an example: you purchase a $100,000 death benefit policy for $1500 a year. You make all of your payments and at the end of the mortgage term you still have $100,000 death benefit.
Whole Life is often considered "permanent" insurance because it is designed to cover the whole life of the insured.

So which is better - it really does depend on YOU, your needs and your budget.

Life Insurance is not one size fits all - as your life changes your needs change. Talk to your insurance agent, most agents love to help their clients be better educated and make informed choices on their insurance coverages.