Life Insurance 101
To the lay person, insurance terminology and details can seem intricate and overwhelming. If you begin with basic questions, and consult with an ethical advisor, you are more likely to arrive at the best conclusion.
- Is life insurance necessary for you right now?
- Will life insurance be necessary in the future?
Answering these basic issues will help you decide and guide you to the correct policy for your current and future needs.
Purpose of Insurance
If you do not have dependents, then it is less likely that you will need insurance coverage.
However, if you have people who depend on your ongoing salary to continue to pay a mortgage or rent, recurring bills, or education, life insurance can help defray these expenses.
If you are a primary caregiver, then life insurance is something you should seriously consider in order to provide some financial support to your children.
How much is enough?
There are no hard and fast rules about how much insurance coverage to secure. There are many mitigating factors like lifestyle, amount of family, debts, etc. Most agree that a good guideline is somewhere between 5 and 10 times your annual salary. A financial planner can help you analyze your current financial situation and project some needs for the future.
Types of policies
There are a number of variants in life insurance policies. Basically there are whole life, term life, participating life, and universal life.
Whole life is a policy with both a death benefit and cash value but is usually more expensive than other types of coverage. A traditional whole life policy offers premiums at a designated rate through the life of the policy, or until it is paid off. Even after there is no more need to pay premiums, the life insurance remains in effect until you pass away.
Participating life policies are a permanent life option that accumulate a cash reserve. This cash is invested by the insurance company and as the policy holder, you share in the revenue generated by this investment. The amount of revenue depends on the success or failure of the investments made.
With a universal life, you can vary the amount of the premium. It is also a permanent life policy that uses a portion of the earnings to cover the premium. There are higher administrative fees associated with this type of policy.