Life Insurance Basics |
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Buying a Policy? |
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How
should I choose what type of life insurance to buy?
You should 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.
Unlike permanent insurance, you will not 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.
You should 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 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 .
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