Life Insurance
Course Section
If your spouse or partner died, would you be able to live comfortably on your own? If you passed away, would your family members have enough financial support? If not, you may want to consider buying life insurance.
Why buy it?
Life insurance provides money for your loved ones, or actually anyone you
designate, after you're gone. The person you designate is called the
"beneficiary." In particular, life insurance proceeds might be used
to pay debt, the cost of the funeral, estate taxes, future college tuition, or
any other current or anticipated expense.
Two Types of Coverage
There is individual coverage and group coverage. You may be able to buy group
coverage if it's offered by your employer, union, or association.
Otherwise, you can buy individual coverage. Generally, group coverage is
cheaper because of the group rates.
Two Types of Policies
There is term insurance and permanent insurance.
Term insurance. This policy pays a death benefit if you die within a specific period of time (the term of the policy). Like auto and homeowner's insurance, term insurance only covers you during the time you're making payments. For this reason, it's less expensive than permanent life insurance. There are four different varieties of term insurance:
- Convertible term insurance lets you convert the policy into a permanent one at any time. There's no medical exam, but premiums may go up.
- Term insurance lets you sign on for a new term policy without a medical exam, although the premium may be higher.
- Level term insurance lets you pay the same premium every year for the length of the term and be entitled to the same amount of proceeds if you die during the term. If you want to renew it at the end, your premium may rise significantly, since you'll be older.
- Decreasing term insurance pays a death benefit that gradually decreases in value over time. Premiums usually remain the same throughout the term.
Permanent insurance. This policy continues until you die (as long as you make timely payments) and may provide a savings feature that builds up a cash reserve you can use while you're alive. In fact, if there's enough, you can use the cash to pay the premiums, which can be helpful in times of tight finances. This insurance is more expensive than term insurance. There are a few varieties of permanent insurance:
- Whole life lets you pay a fixed premium for a fixed death benefit. There is a cash savings feature that, over time, provides you with a cash reserve.
- Universal life is a little more flexible than whole life. It may let you change the amount of insurance as your needs change. Some changes may require a medical exam.
- Variable life invests some of your premiums in stocks, bonds, and money market funds. The upside is that your investments may perform well, and provide a larger cash reserve. The downside is the risk that the investments will lose money, but a minimum cash value is seldom guaranteed. Most insurers guarantee a minimum death benefit, although it may not be what you had hoped to receive.
- Variable-universal life combines the premium and death benefit flexibility of universal life with the investment flexibility and risk of variable life insurance.
Take Action
- Use these interactive tools to find out how much life insurance you need: http://moneycentral.msn.com/investor/calcs/n_life/main.asp and www.bankrate.com/brm/insurance-advisers/life-insurance.asp
- Answer these questions to find out what type of life insurance suits your needs at www.bankrate.com/brm/insurance-advisers/type-insurance.asp
- Look for an insurer in your state for any type of insurance, using an online service from the Insurance Information Institute. See the box titled "Individuals" at www.iii.org. (Note, the box rotates three different content messages, so wait for the one you want to appear, then click.)
- Be sure that the insurance company offering the policy will be financially
sound when, or if, it comes time to pay your claim. Use these services:
A.M. Best
908-439-2200
www.ambest.comMoody's Investors Services
212-553-0300
www.moodys.comStandard & Poor's Insurance Ratings Service
212-438-2000
www.standardandpoor.com
AARP Resources
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Because your Money Matters, get more tips and action steps on Life Insurance - PDF file |
Additional Resources
For state insurance information, check www.naic.org/state_web_map.htm.
Order the Federal Consumer Information Center (CIC) guide to buying life insurance, "What You Should Know About Buying Life Insurance," at www.pueblo.gsa.gov/acli/index.htm.
