When and How to Buy Life Insurance

Life insurance represents a contract that exists between the policy owner and the life insurance company. Once the contract is signed, the policy owner agrees to make a payment, known as the premium, to the insurance company at a set time each month, quarter or year. In exchange for accepting the premium, the life insurance company agrees to supply a cash payment to the person indicated by the insured individual upon his or her death. The cash payment is called the death benefit. The person who receives the money is known as the beneficiary.

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When to Buy Life Insurance

People with dependents need to buy life insurance. It is intended to protect families from economic hardship if the primary earner dies. Since more families now require two salaries to make ends meet, and must also save for retirement, life insurance should not be an item that is dropped during financially challenging times.

The best reasons to buy life insurance are to:

  1. Make sure all final expenses, including funeral and burial, are paid for
  2. Make sure a spouse will have enough money to pay a mortgage and other debts
  3. Make sure the cost of a child’s or grandchild's college education will be paid for
  4. Make sure surviving family members will not experience a decrease in the standard of living

Life insurance is also purchased for estate planning reasons. Because the death benefit paid is usually free from federal tax, it can be used to pay any inheritance tax or property tax, capital gains tax or any other tax that must be paid by the beneficiary when significant assets are part of the estate.

A life insurance policy can also be helpful for a business owner who wants to make sure that his or her portion of a business can either be sold or given to the person of his or her choice. A death benefit large enough to cover the sale of a business can prevent a disorderly closing and the potential loss of jobs.

When to Buy Term and Permanent Life Insurance

There are two kinds of life insurance policies: Term life and permanent life. A term life insurance policy remains in force for a limited number of years, provided the policy owner pays the premiums according to the contract. The number of years the policy is in force is known as the term. The term can be as short as one year or as long as 30 years. However, most insurance companies will not issue a term life policy to an individual beyond his or her 75th birthday. If the policyholder dies within the term, the insurance company will pay the death benefit to the beneficiary. If the policyholder is alive when the term ends, the contract ends. This means that there is no longer coverage.

Term insurance is the most cost effective form of life insurance. It is therefore the most recommended type of insurance for a young family. Because a young family usually has additional financial burdens and less cash, the main purpose of the policy is to cover expenses.

Buying term life insurance is a wise decision for a cash-strapped young family. The money that is saved on an expensive permanent policy can be invested, used to pay down debt or saved. And, a term policy can usually be converted to a permanent policy.

Permanent life insurance lasts as long as the policy owner maintains the policy by paying the premium when due. Permanent insurance also has what is called a “cash building” investment feature. With a term insurance policy, the entire amount of the premium is applied to the cost of paying the death benefit. With a permanent life policy, some of the premium is applied toward the cost of paying the death benefit and some is placed in the investment cash account.

Whole life and universal life are two popular types of permanent life insurance policies. The main difference between these two policies is the way the premium is invested by the insurance company. With a whole life policy, the policyholder chooses from a number of different account structures, while not having to determine how to invest the premium. A universal policy, however, requires that the policyholder choose among several fixed, indexed or variable funds. The cash part of the premium is then invested as directed by the policyholder. Some life insurance companies will at least guarantee a rate of return while others do not.

How to Buy the Best Life Insurance Policy

The Internet is an amazing source of information when it comes to buying life insurance policies. Start by thinking about the needs of the family. Does the insured provide sole financial support for the family? Is he or she responsible for dependent children? Are the children young or are they in college?

Think about how large the death benefit will need to be in order to cover all of the expenses the family will incur. If the insured chooses to simply cover final expenses, a smaller death benefit might be best. But, if the death benefit must pay final expenses, a monthly mortgage payment and a child’s college tuition, it will need to be much bigger. Finally, think about the amount of money that can affordably be spent on the premium. The size of the premium will be in part determined by the size of the death benefit.

Buy Life Insurance for Family Protection

It helps to think of term life insurance as protecting a family and the income of the insured for a limited amount of time. Permanent insurance, on the other hand, protects a family and assets permanently. Young families often start with a term policy and then upgrade it to a permanent policy as their financial situation changes and more assets are accumulated. Most life insurance companies encourage this conversion in order to make sure their clients have the best and most appropriate coverage at all points of their lives.

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