Buying life insurance: what kind and how much?

Who Should Have Life Insurance?

If there are individuals who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple’s retirement savings being depleted by unexpected medical expenses.

Six Different Strategies: Match Your Choice To Your Needs

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. As you get older, the premiums tend to increase each time you renew. A level term policy locks in the annual premium for periods of up to 40 years, depending on the insured’s age.

Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires.

Unlike many other policies, term insurance has no cash value. In this sense it is “pure” insurance without any cash value component. Benefits are paid only if you die during the policy’s term. After the term ends, your coverage expires unless you choose to renew. When buying term insurance, you might look for a policy that is renewable up to an age when you think you will no longer need insurance and convertible to permanent insurance without a medical exam.

Return of Premium Term insurance will repay you the amount you spent in premiums in the event you outlive the term of the policy. Whether you die while the policy is in effect or outlive the policy, the money you put in will be distributed to your beneficiaries or to you, respectively.

Whole Life insurance combines permanent protection with a cash value accumulation component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy’s cash value tax-free. Outstanding loans accrue interest, reduce the policy’s death benefit, and increase the chance that the policy will lapse.

Universal Life policies are also highly flexible in regard to premiums and face value. Premiums can be increased, decreased, or deferred within certain limits, and cash values can be withdrawn, although this will decrease the policy’s death benefit. You may also have the option to change face values. Universal life policies typically offer a guaranteed rate on cash value, which may vary, depending on the policy provisions. You’ll receive an annual statement that details cash value, total protection, cash value accumulation, and fees.

Variable Life insurance generally offers fixed premiums and a variety of investment options. Your cash value is invested in your choice of stock, bond, or money market portfolios.* Cash values and death benefits can rise and fall based on the performance of your investment choices.

Although death benefits usually have a floor, there is generally no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, any cash value accumulation accrues tax-deferred as long as the funds remain invested in the insurance contract. (Withdrawals and loans against a policy’s cash value will reduce policy values and death benefits, increase the chance that the policy will lapse, and may trigger tax consequences.)

*An investment in a money market portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the portfolio.

Universal Variable Life insurance combines flexible premiums and choice of investment options. Like variable life, you select investment options in your portfolio. As with any financial product that carries an investment element, this kind of contract’s flexibility and upside potential growth carries corresponding risk