Buy Life Insurance That Makes Sense
By Rosemary Carlson
Remember one thing when you're buying life insurance. Unlike health and other types of insurance, you will never receive any benefits from it. Instead, someone else, the beneficiary you designate, will receive the benefits. When you think of buying life insurance in this way, it puts a whole new spin on things.
Given this perspective, if you're a single individual, without dependents, you don't need life insurance. All you need is burial insurance -- enough life insurance for your final expenses.
If, however, you have a family, you need life insurance to protect them. The life insurance you buy should replace the net income that you bring home every month. In addition, it should be enough to pay off your family home and car, as well as any other large bills you may have. You also have to consider future expenses for your children, such as college. You might want to buy enough life insurance to insure that your children get a college education.
Most people only need term life insurance. Term life insurance is just what it says. It gives you coverage for your life for periods of one year to 30 years. It's a plain vanilla, straightforward policy. At your death, a term life policy pays your beneficiary the face value of the policy.
On the other hand, you also have the choice of buying whole or universal life insurance. Whole life insurance is actually a combination of a life insurance policy with an investment component. As you pay your premiums, you build up cash value in the policy that you can later borrow against. It serves, in effect, as a forced savings plan. Unfortunately, the interest income that the insurance company pays you on your premiums is very low. On the other side of the coin, you can also borrow against the cash value of your policy at low, fixed interest rates.
Due to the expanded features of whole life insurance, it is more expensive than term life insurance. Most people do not need whole life insurance. If you have a savings and investment plan, there is no need to pay the extra monthly premiums that a whole life policy demands. You can get more coverage and be assured that your family is adequately protected for less money with term life.
Don't depend on just the life insurance your place of employment offers. They may withdraw coverage as a cost-cutting measure. You may not always work for the same employer. Have your own private life insurance policy, though it's likely to be a little more expensive than any group policy you might have through your work.
If you smoke, you might as well confess to your insurance agent. You will, indeed, pay higher insurance premiums. If you don't confess, your insurance company can choose not to pay your beneficiary if you die of a smoking-related illness and you didn't tell them that you were a smoker.
Buy more, instead of less, term insurance. Often, the more insurance you buy, the less expensive it gets dollar for dollar. Calculate what you think your family will need and buy that amount and no more.
Last, find a reputable insurance company and agent. The recent tragedies in the U.S. have everyone considering whether they have enough life insurance. Work with an ethical firm who will give you good value for your money.
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Rosemary Carlson is a freelance business and financial writer and a professor of finance at Morehead State University.