Why do you care?
So you just want to purchase some life insurance. It should be simple. You want your beneficiaries to have some money to stay afloat in case you pass away. You know that your spouse may need some help adjusting to a loss of your income. You want to make sure your children have money for education. Maybe you’d like to leave a legacy, keep a business going, or donate to a favorite charity. However once you really start researching various policies, the matter can seem more complex. You need to decide if you should buy a term, or temporary policy, or if you should buy a whole life policy that will not expire. You also need to estimate the amount of coverage you would like, and then balance that against the cost of the premium.
How Much Do You Need?
Now about that financial needs estimate, or calculating how much of a death benefit you need. I would advise you to sit down and thing about how much life insurance you would like to purchase in a perfect world where it would not matter how much that protection would cost. Be sure to consider outstanding debts, your own funeral costs, a spouse or child’s needs, and any other factors you can think of.
Now take that face value and look at some price quotes. If you think you need to leave your wife with ten million dollars, then that’s great. However if the cost of that million dollars doesn’t look like something that will fit into your budget, then maybe you need to think again. The reality is, a life premium is one of those things that tends to get dropped when jobs are lost or unexpected expenses pop up. You need to purchase a policy you can afford because a dropped policy will not do your family any good!
What Type Do You need?
Term life is, as the name implies, purchased for a specified term of years, usually from 10 to 30. Some term policies can even be purchased for one to five years and are good for some uses. The longer the term, the more it will cost. The higher the face value, the more the insurance will cost. However, term life insurance is generally the cheapest form of life insurance and is suitable for the biggest needs of many people.
Whole life is purchased to cover a person for their whole life, as long as the policy is kept in force. A policy is kept in force by paying premiums or having a policy paid up. With whole life policies, you can often pay it up over a period of time, like ten or twenty years. Of course, since everybody will pass away, and the insurance company knows that they must eventually pay out on their contract, this type of insurance costs more than term insurance. The advantage is that whole life insurance does not expire.
Really, I suggest that families with lots of obligations take out a larger term life policy, and then purchase a smaller amount of whole life that can be paid up. That way, in twenty or thirty years, when the term life expires, they will still have the security of a whole life policy to cover their funeral or final expenses when they do die.
Universal is also a form of coverage that does not expire as long as it is kept in force. Universal life is more complex, because it has different accounts for the cash value and life insurance accounts. Traditional whole life insurance bundles these together. For this reason, and because of favorable tax treatment of insurance by the IRS, some people find that Universal life insurance is an ideal way to combine life insurance and savings. When the policy builds up enough cash value, that many can be “borrowed against” or withdrawn. The face value can even increase. It would take another article to fully explain universal life insurance, and if it makes a good choice for you, but this is the basic explanation of universal life insurance.