Life insurance is an essential component of financial planning, especially for people with dependents. And it is no simple topic, given the number of variables to consider and the wide array of plan types that are available .It pays to understand the subject thoroughly so you can make an informed decision about what type of coverage you need and how to get it for a reasonable price.
Function
Life insurance can replace your income so that a spouse or other guardian can afford to raise your children. It can cover the cost of your funeral and burial. It can create an inheritance for your children or other heirs, even if you have not been able to accumulate much in life. And, if you choose certain types of policies, life insurance can serve as a source of savings. Generally, though, life insurance is not a good investment deal, according to SmartMoney magazine, as the whole-life policies with such a component tend to come with high fees and commissions. Even worse, according to the magazine, "it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment."
Types
The two main types of life insurance are term and permanent. Each type has numerous subtypes. Essentially, term policies pay the face amount as the death benefit. You pay the premium as agreed for a set term, and when you die, the insurance company pays your beneficiaries the face value of the policy. Permanent life insurance policies, of which whole-life, universal and variable are variations, build a cash value over time through an investment component. If you like, you may withdraw the cash value or borrow against it. You can also use the cash value to pay ahead on your premiums. In a standard permanent life insurance plan, your beneficiaries do not, upon your death, receive the cash value of the policy, according to Insure.com. They only get the face value. For the face value payout offered, term life insurance is much cheaper than permanent life insurance.
Time Frame
Term life insurance policies come in fixed increments such as 10, 15 or 30 years. Depending on the type of policy you buy, the monthly premium may stay the same throughout the term or it may change. You can choose a term based on how much longer you will have people depending on your income, according to Insure.com. Most term policies contain a guaranteed renewal provision: At the end of the term, you can renew regardless of your health status, although the premium will be higher. Whole life insurance insures you for life as long as you pay the premiums.
Considerations
One of the biggest considerations when buying life insurance is how much to buy. Examine how much income your dependents will need to replace when you die and purchase that amount of life insurance. While your current salary is one factor to consider, it is not the only one. Your loved ones may need more than that amount each year if they save for retirement, buy a home or have unexpected medical or legal expenses. Your beneficiaries may be eligible for Social Security survivors' benefits, which make the equation even more complex.
Considerations
Expect plenty of paperwork when you apply for life insurance. Also be ready to submit to a medical exam and of questions about your lifestyle and medical history. You will probably have to give a blood sample and a urine sample. All in all, the process can take up to six weeks, according to Insure.com. Only in the case of group plans offered by an employer or certain types of relatively private plans, such as simplified issue and guaranteed issue, can you avoid taking a medical exam.
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