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 When talking about protecting our families financially, life insurance is usually one of the first things that comes to mind. However, buying life insurance can be a daunting task if you don’t know what to do. But, with a two-minute education, you can learn the questions to ask to make sure you and your family are properly protected.
How much coverage should you have for family protection? One method of determining this is a needs analysis. This is an accounting of assets and liabilities. It is done to determine how much income can be generated from remaining assets, and how much life insurance is needed to provide a desired amount of income. Another method, known as an economic life value, is to calculate what an individual’s earning potential is. This amount will depend upon how much you earn and how old you are and can be equal to your earnings or 20 to 30 times your earnings. Either way, an insurance company will generally not give you more insurance than you are worth!
What type of insurance should you purchase? There are basically three different types of insurance available upon which hundreds of variations are made.
The first type is term insurance. This policy allows you to purchase coverage for a specific time period and amount. It does not accrue a cash value, and in most cases if it isn’t used or converted to another type within the selected term period the insurance company keeps all of the premiums. The premium for term insurance is usually very low in relationship to the amount of coverage and allows for a large amount of coverage for family protection. It is usually unwise to keep term insurance forever, because the premiums often rise quickly at older ages; and if you outlive the term of the policy, there is no benefit.
The second type is universal life. This policy is sometimes seen with the word “flexible” in the name. It is comprised of term insurance and cash value. The cash portion can come in two varieties: either a fixed interest or investment component (called variable universal life). This insurance can allow for the policy-owner to adjust both the premium and death benefit.
The third type is whole life insurance, and it is designed to provide coverage for your whole life. It is comprised of a guaranteed premium, guaranteed cash value and guaranteed amount of coverage, also known as death benefit. Whole life insurance has an age at which it is “paid-up,” meaning that no more premiums can be put into the policy. Depending on how well the insurance company performs, a non-guaranteed dividend can also be credited to the policy-owners. Dividends can be used in many ways, but frequently to increase the performance of the cash value and coverage. When the cash component of whole life insurance is in investments, it is known as variable life insurance.
For more details about how the different types of insurance fit your financial situation, talk to your Life Insurance Professional. And remember, having too much is better than having too little. •
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