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the Amount of Life Insurance
Your need for life insurance will vary with your age and
responsibilities. The amount of insurance you buy should depend on the
standard of living you wish to assure for your dependents. You should
consider the amount of assets and sources of continuing income
available to your dependents when you pass away. Simply stated, you
should choose an amount of life insurance that is determined necessary
to meet the needs you are trying to satisfy. A balance needs to be
achieved in this process. To be over-insured can negatively affect
your budget and threaten your long range financial goals just as much
as being under-insured can. While each person must individually assess
their responsibilities, needs, and financial situation, it is
important to be careful to choose an amount of life insurance that
reflects your specific circumstances without under-insuring or
Steps To Determine How Much Life Insurance You Need:
Determine how much life insurance you need based on the factors
Decide how much money you can afford to pay.
Choose the type of life insurance policy that meets your coverage
goals and current family budget. Fitting these two factors together
will move you toward a successful overall financial plan.
There are many reasons for purchasing life insurance,
among which are the following:
Insurance to provide financial protection and security for surviving
family members upon the death of the insured person.
Insurance to cover a particular need such as paying off a mortgage
or other debt upon the insured's death.
Business insurance to compensate a company on the death of a key
employee or to provide a surviving partner the resources to buy out
the deceased partner's share of the business.
Insurance to provide funds to pay estate taxes or other final
obligations necessary to settle a deceased person's estate.
Insurance to provide the funds necessary for the deceased person's
Choosing the Appropriate Type of Life Insurance
two basic types of life insurance: term life insurance and cash value
life insurance. There are many policy variations between these two
types of life insurance.
Term Policies provide life insurance for a specified period of
time. This period could be as short as one year or provide coverage
for a specific number of years such as 5, 10, 20 years or to a
specified age. If you die during the term period, the company will pay
the face value to your beneficiary. If you live beyond the term period
you had selected, no benefit is payable. As a rule, term policies
offer a death benefit with no savings element or cash value. If you
have a limited amount to spend, and only need insurance for a
specified period of time, you may be able to get more coverage by
buying term insurance than by buying cash value insurance. Keep in
mind that the cost of term insurance increases as you get older, which
may make it more expensive than cash value insurance in the long
run. Today's term policies usually have two sets of premiums:
guaranteed maximum premiums and current premiums. Current premiums are
usually much lower, but they can be changed by the insurance company.
The insurance company cannot increase the current premium above the
guaranteed maximum premiums shown in the policy. When you buy term
insurance, you need to make a choice as to how long you want the
protection. You may renew the policy without a physical examination
for the period of years specified in the policy. Some term insurance
can be converted to cash value insurance up to a specified age with no
physical examination. Premiums for the converted insurance will most
likely be higher than the premiums you would be paying for the term
insurance. If you do not pay the premium for your term insurance, it
will generally lapse without cash value, as compared to a permanent
type of policy that has a cash value component.
Cash Value Insurance combines death benefits with a cash value
accumulation feature. The buyer of a cash value policy pays more in
the early years than for term insurance, but the premium not needed to
pay for the cost of the death benefit accumulates with interest within
the policy. If the policy is surrendered before the insured person
dies, there may be a cash value paid to the owner, less any
outstanding loans placed against the policy.
Some of the most popular types of cash value insurance are described
Whole Life Insurance (also known as straight life, ordinary life, and
traditional permanent insurance) is designed to provide coverage for
your entire lifetime unlike term insurance which provides protection
for a specified time period. To keep the premium level, the premium at
the younger ages exceed the actual cost of protection. This extra
premium builds a reserve (cash value) which helps pay for the policy
in later years as the cost of protection rises above the premium.
Whole life policies stretch the cost of insurance over a longer period
of time in order to level out the otherwise increasing cost of
insurance. Under some policies, premiums are required to be paid for a
set number of years. Under other policies, premiums are paid
throughout the policyholder's lifetime.
Universal Life Insurance is the most flexible of all the various kinds
of policies because it treats the elements of the policy separately;
universal life allows you to change or skip premium payments or change
the death benefit more easily than any other policy. It works by
treating the three elements of the policy, premium, death benefit and
cash value separately. Cash values are accumulated by crediting
premium payments and interest to a fund from which deductions are made
for expenses and cost of insurance. Interest rates are linked to an
external index such as Treasury bills. Because the cash value element
of this type of policy is interest rate sensitive, predictions of
future Life costs are highly dependent upon the accuracy of interest
rate projections. The policy can also be structured to operate like
Variable Life Insurance has a death benefit that varies in relation to
the investment experience of the assets underlying the policy. A
higher rate of return on the invested fund will cause the death
benefits to increase, while a low or negative rate will cause the
death benefits to decrease.
Variable Universal Life Insurance combines the flexibility of
universal life insurance with the investment account features of
variable life insurance.