What Kind of Life Insurance Should I be Buying?


Before you can decide what type of life insurance you need, you should first determine if life insurance is needed. Typically we buy life insurance to solve an economic need caused by the death of an individual most often in the role of family member, business associate or debtor.

Once the decision has been made to purchase life insurance, be it for income replacement, business settlement, estate preservation or charitable giving, it is necessary to investigate the use of term or permanent insurance policies to solve the need.

Term insurance refers to the type of policy that has no savings or investment component. It is strictly a stated amount of money to be paid to the named beneficiary or beneficiaries if the death occurs, while the policy is still in effect, during a specified time period. The key phrase is “a specific time period”. This is the reason why the insurance is referred to as “TERM”.

As a general rule, if the need is to meet a specific time frame such as debt settlement, college funding, or something similar, then term insurance may be the most practical choice.

With term insurance you are buying the death benefit or risk management only. Younger buyers of life insurance typically find that a significant amount of income replacement is available for very modest premium expenditures. Term insurance has only a death benefit component and that usually allows for more coverage on fewer dollars spent, all other things being equal.

As the name “TERM” implies, the coverage is for a set period of time, commonly 10, 15 or 20 years. Should the death of the insured occur outside that time frame then there is no death benefit for the named beneficiary.

If the purpose of the insurance is to cover a need to match the insured’s lifetime then a more permanent coverage is considered more appropriate.

Permanent insurance today is still known as whole life; however it may be in the form of fixed whole life, universal whole life or some combination thereof. Permanent insurance, or whole life, differs from term in that a savings or investment value is included in the policy. At its basic element this allows for coverage to be purchased that remains in place for your lifetime or an endowment, providing premiums have continued to paid, or until your needs changes and you redeem the policy.

Both types of coverage pay death benefit to the designated beneficiary, but whole life can provide a cash benefit prior to death.

In this situation the insured, or the owner, makes premium payments that exceed the actual cost of insurance. The extra premium is then allocated to the savings or investment portion of the contract in various ways, for example: by earning a stated rate of interest from the insurance company (fixed); or it may be invested by the insurance company to try to earn interest that differs from year-to-year (universal life).

Whole life has two primary features that deserve consideration during your evaluation process. One is to have insurance that will be in place for the duration of your lifetime and the other is the tax favored accumulation. In other words, the gains in your policy are not subject to current income tax. However, if money is withdrawn from the policy other than as a death benefit, there may be a tax on the gain as well as a possible penalty (like the premature withdrawal from an IRA prior to age 59 1⁄2).

The ultimate decision on which type of insurance is more appropriate involves consideration for the need, the amount of time to fulfill the need, your cash flow, your age, health and other underwriting concerns.

There is no perfect insurance option, therefore it advisable to seek assistance in the decision process. Feel free to give me a call if you have questions on what options would be best for you and your family, especially as it relates to your long term financial goals.


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