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What Type of Life Insurance is Best for You?

February 2007
What Type of Life Insurance is Best for You?

When someone asks me a general question on finances, such as, ‘What type of life insurance is best?' my response is usually the same: It depends!

In shopping for life insurance, the first question you need to ask yourself is, ‘How long do I need to the insurance for?' Do you plan to keep the policy as long as you live, even if it happens to be 100 years? Or are you planning to keep it for the next 10, 20, or 30 years – until your children have grown up and settled?

I think most people are better suited for basic Term Life insurance. The benefit of Term is that it is relatively cheap, based on your age and health status, and there is very little commitment in keeping the policy in place for long periods of time. Since most people need a significant amount of life insurance, generally 5-10 times one's annual salary, Term is an easy solution to ensure adequate coverage without big premiums.

On the other hand?

The disadvantage of a Term policy is that once the term period is up (10, 20, or 30 years), the premiums also go up significantly, hence making it unaffordable for most people. That's why, if you plan to keep the coverage for your entire life, you are generally better off with a permanent policy. There are many types of permanent life insurance policies: the traditional Whole Life, Universal Life, Variable Life and more recently, Indexed Universal Life. There are significant differences between these types of policies, and it is in your best interest to get educated about them before buying a policy. It is not in the scope of this article to explain the various differences between these policies.

What attracts many people to permanent insurance policies is that all of them have a cash accumulation feature. Meaning, a portion of what you pay as premiums, gets credited into a cash accumulation account, which after several years, may amount to a significant cash value. This cash value can then be used to offset future premiums or to draw loans or make withdrawals. If the cash accumulation is adequate in the later years, the insured, in many cases, can opt to stop making payments into the policy. The policy uses the accumulated cash value along with the interest and/or investment earnings to pay for the premiums for the remaining years. It is important to realize that, one way or another, you are paying for your life insurance as long as you are living. The payments in a cash value policy are just coming from the savings built inside your policy.

There are also several tax benefits associated with cash value policies. The money that is accumulated as cash value, grows tax deferred, meaning you don't have to pay taxes on the interest and investment earnings in the account. The death benefit of life insurance is tax free to the beneficiaries, and if you are accessing the cash accumulation inside your policy with loans, the loans are also tax free. These features make cash value policies very attractive to some people as a wealth accumulation and transfer vehicle.

Most Important Things to consider

Many times people forget why they are purchasing life insurance. The primary purpose of life insurance is income replacement in case of your untimely demise. Also, it is more important to have adequate amount of life insurance based on your current needs, hence making Term Life insurance an important consideration – especially if affordability is a concern. It is highly recommended that you consult a professional insurance agent or financial planner to help you determine what type of policy is right for you and the amount of insurance you should have.

By Rajesh Jyotishi

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