There are two basic types of life insurance policies: whole life insurance and term insurance. Whole life is a mixture of protection and investment, and term coverage is strictly protection. The whole life policies invest a part of the premiums in stocks, bonds or money-market funds to generate income. As the cash value portion of the policy increases, you can borrow money from your policy without paying any taxes. Term life insurance coverage gives you a set amount of protection for a specific period. You can usually buy coverage for anywhere from one to 30 years.
What to Look for
The first question to ask is, "Do I really need life insurance?" If you're single and have no one relying on you for support, you probably don't need life insurance. But if you do need life insurance, there are some things you should know before you buy. First, decide why you need coverage. This will let you choose the right dollar amount and the right length for your policy. Say you have a 7-year-old daughter and want to make sure she can go to college if something happens to you. In this case, you'll want to plan on at least a 15-year policy. And, by checking out the colleges she may want to attend, you can estimate how much it will cost by the time she's ready.
When you buy insurance it's best to think about life stages. When you have a young family and mortgage you need to have enough protection to make sure your family can keep the house. But, as you get older, you'll probably need less protection. You'll pay down your mortgage and your kids will be grown and on their own. If you've done well financially, you may reach a point that you no longer need any life insurance.
You should also check the ratings of insurance companies before you buy. Most are reputable, but we've seen too many bankruptcies in recent years. Ratings form A.M. Best, Moody's and Standard and Poor are good sources. Finally, spend some time on the computer. It's a great way to compare prices and guarantee you're getting the best deal.
Common Pitfalls
Life insurance is protection, not an investment. It's simply more practical to buy term life insurance for protection--and to invest your money somewhere else. Whole life insurance is more expensive, the rates of return are not guaranteed and the commissions are high. Term insurance lets you pay only for the protection you need.
Do your best to buy coverage when you're healthy, but if you are sick, tell the truth. You'll pay more for coverage when you're sick, but don't lie--the insurance companies always investigate before they pay. Also, buy enough coverage. It's better to leave your family with too much than too little. The length of your policy should fit your personal need. A five-year policy won't help your 7-year-old go to college.
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