Life Insurance ...
Buying life insurance is not like any other
purchase you make. When you pay your premiums, you are buying the future financial
security for your family that only life insurance can provide. Among it's many uses, life
insurance helps ensure that, when you die, your dependents will have the financial
resources needed to protect their home and the income needed to run a household.
Life insurance also can be used to help with
other financial goals, such as funding retirement or education expenses, for business
purposes, such as buy/sell agreements and key employee coverage and for charitable uses,
such as bequests. However, it is important to remember that the main purpose of life
insurance is financial protection. If your primary goals are something other than
protection, you should consider what other financial products are available to meet those
Choosing a life insurance product is an important
decision, but it is often complicated. As with any major purchase, it is important that
you understand your needs and the options available to you.
Learning the Basics ...
How much life insurance do I need?
Before buying life insurance, you should assemble
personal financial information and review your family's needs. There are a number of
factors to consider when determining how much protection you should have. These include:
any immediate needs at the time of death,
such as final illness expenses,
burial costs and estate taxes;
funds for a re-adjustment period, to
finance a move or to provide time
for family members to find a job; and
ongoing financial needs, such as monthly
bills and expenses, daycare
costs, college tuition or retirement.
Although there is no substitute for a
careful evaluation of the amount of coverage needed to meet your needs, one rule of thumb
is to buy life insurance that is equal to five to seven times your annual gross income.
What is term insurance?
Term insurance provides protection for a specific
period of time. It pays a benefit only if you die during the term. Some term insurance
policies can be renewed when you reach the end of a specific period which can be from 1 to
20 years. The premium rates increase at each renewal date. Many policies require that
evidence of insurability be furnished at the time of renewal for you to qualify for the
lowest available rates.
NOTE: For additional information refer to: Advantages and Disadvantages.
What is permanent insurance?
Permanent insurance provides lifelong protection and
is known by a variety of names
(Refer to: Types of Permanent Insurance). As long as you pay the necessary premiums,
the death benefit will always be there. These policies are designed and priced for you to
keep over a long period of time. If you don't intend to keep the policy for the long term,
it could be the wrong type of insurance for you.
Most permanent policies - including whole, ordinary, universal, adjustable and variable
life - have a feature known as "cash value" or "cash surrender value."
This feature, which is not found in most term insurance policies, provides you with some
You may cancel or "surrender"
the policy - in total or in part - and receive
the cash value as a lump sum of money. If you surrender your policy in the
early years, there may be little or no cash value.
If you need to stop paying premiums, you
can use the cash value to continue
your current insurance protection for a specific period of time or to provide a
lesser amount of protection to cover you for as long as you live.
Usually, you may borrow from the insurance
company, using the cash value
in your life insurance as collateral. Unlike loans from most financial institutions,
the loan is not dependent on credit checks or other restrictions. You ultimately
must repay any loan with interest or your beneficiaries will receive a reduced
The cash values of many life insurance
policies may be affected by your company's future experience, including mortality rates,
expenses and investment earnings.
Keep in mind that with all types of
permanent policies, the cash value of a policy is different from the policy face amount.
Cash value is the amount available when you surrender a policy before its maturity or your
death. The face amount is the money that will be paid at death or at policy maturity.
[Source: Buying Life Insurance by
the American Council of Life Insurance]
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