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Life Insurance Is The Sound Of The Future.
How to choose the right type of life insurance
Choosing the right type of life insurance can be confusing, but it’s also an important decision. Here are some guidelines that can help you narrow down your best life insurance options.
Consider term life insurance if...
You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.
You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed or a new one bought. Unlike permanent insurance, you will not typically build equity in the form of cash savings.
If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.
Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.
Consider permanent life insurance if...
- You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be over 100.
- You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due the company before determining what’s goes to your beneficiary.
Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.
There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. For more details, see our articles on the specific types of policies.
Whole or ordinary life
This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
Universal or adjustable life
This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.
This policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.
If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.
Choosing a life insurance policy
Insurance companies pay fat commissions for selling whole life policies; perhaps 80% of your first year’s premium goes to the agent. Commissions for selling term-life policies amount to roughly the same percentage of first-year premiums. But since whole-life premiums are much higher than premiums for term-life policies with the same death benefit — they can be five to ten times more — agents make much more money selling a whole-life policy than they do selling a term policy.
It’s no wonder, then, that agents push whole-life policies as if their livelihoods depend on it. But the fact is the vast majority of those who need insurance should buy term.
The main reason is cost. Term policies are cheap for relatively young people who are in good health.
Agents will argue that whole-life policies are superior because you can keep them the rest of your life and build up cash in them tax-free, which can then be borrowed.
That’s true, but they don’t tell you about the high fees and commissions built into whole life as well as surrender charges (if you want to cancel the policy) that often leave you with little or no cash value five and even 10 or 15 years after you take out the policy.
The point of a tax-free buildup of cash just isn’t that powerful anymore, given the proliferation of IRAs, 401(k)s, and other tax-advantaged savings vehicles that have tiny commissions, much higher yields and complete portability.
So stick with term, and do your investing elsewhere.
One more thing: Steer clear of so-called mortgage insurance policies, which pay off the balance on your mortgage if you die. The problem is that you are paying for a steadily declining amount of coverage, as you pay down your mortgage. It’s best to include the mortgage payments in your calculations when determining how much coverage you need.
Some financial planners say you need enough insurance to replace five to seven years of your salary. If you have young children or significant debt, you should bump up your coverage so you have enough to replace as much as 10 years of your salary, they say. Remember, the sole purpose of life insurance is to replace your income in case you die, so that your dependents can maintain their current lifestyle.
Will the surviving partner have child care expenses if one partner is out of the picture? Do you have other assets on which to draw? Will your children be out of the nest soon? These, and many other factors, influence the decision on how much coverage you need.
The secret to buying a policy with the right term is figuring out how long you need to be insured. Start by estimating when your children will be out on their own and no longer in need of your financial support. You may also want to cover your spouse for your lost income until what would be your normal retirement age.
Life insurance is not a substitute for a retirement plan. You want to plan so that you’ll have enough to live on when you retire, and you won’t have to keep paying insurance premiums.
There are exceptions, however. People who start families late in life, or who have complex estate-planning issues, may well have a need for life insurance beyond the customary retirement age.
When to buy:
The cheapest rates, known in the business as select or preferred, go to those who are in good health and who have a family history of good health. If you have a health condition, are grossly overweight, smoke or have a risky occupation, you may pay 50% more than preferred rates.
So there’s a good case to be made for getting a policy early in life while you are still in good health. However, it doesn’t make much sense to buy one until you have dependents.
4 Examples of Life Insurance Concealment
Life-insurance concealment occurs when an individual who is trying to get a life insurance policy does not provide important information to an insurer. This can negatively affect the insurance contract, and it could void the contract if the insurance company finds out the truth. Here are a few examples of situations that could represent life-insurance concealment.
1. Not Mentioning Smoking
One of the most common examples of life insurance concealment is when an individual does not tell the insurance company that he smokes. The individual could smoke two packs of cigarettes per day and then not tell the insurance company this when he fills out the application for a life insurance policy. When he tells the insurance company that he does not smoke, he will receive a less expensive premium. However, smoking significantly increases the risk of the individual to suffer from a number of conditions like lung cancer and emphysema. If the person then dies of a smoking-related illness, the insurance company may not pay the claim because it did not know about the smoking.
2. High-Risk Professions
In some cases, individuals will not disclose their true professions when filling out life insurance applications. Some jobs are much more dangerous than others, and life insurance companies need to know if you work in a dangerous vocation. If you work in a dangerous setting, you could significantly increase the odds of dying at a relatively young age. For example, if you are a sky diving instructor or a coal miner, you have a much more dangerous occupation than the average person. The insurance company will typically charge you more for insurance premiums, or it will deny coverage to begin with. If you die on the job, the insurance company may not pay your claim.
4. Dangerous Hobbies
If you engage in dangerous hobbies on a regular basis, your life insurance company should know it. Many people regularly engage in thrill-seeking activities in order to experience a rush. While there is not necessarily anything wrong with this, you should tell your life insurance company if you are at an increased risk of death. For example, if you regularly go bungee jumping or extreme rock climbing, it could have an effect on your life insurance policy.
How much income your family would need per year to replace your lost income? Keep in mind that when you are alive part of your income goes to sustaining your own needs and activities, so if your income was $75,000, but you used a portion for your own consumption, you may want to consider that. Also, if you cover your mortgage in the death benefit, would a portion of your income have gone to that? These factors can reduce the amount of income you need to replace. The answer to income replacement is not always straightforward, so consider this carefully.
- How many years would you need to provide the income for?
- If you have a spouse, would they work after your death? How much income do they make to contribute towards family expenses? How long will they work?
- Do you need to provide funds to be used for education, like college?
- How much debt does the family (or you) have? Do you want to cover this in your life insurance?
- Are there outstanding loans, medical bills, mortgages?
- What would your family’s expenses be as a result of your death? Consider funeral expenses, costs of hired help at home, etc.
- What investments and savings do you have?
3. Serious Health Condition
Another example of life insurance concealment is when an individual does not disclose to the insurance company that she has a serious illness. Some life insurance companies will not do comprehensive testing that can tell if you have any type of disease. Some companies will require a basic blood test and a physical examination. However, some things will not show up during this examination. If you know that you have something wrong with you and you do not disclose it, this could be considered concealment. If you die from this condition shortly after purchasing life insurance, there is a good chance that the life insurance company will not pay the claim.