Introduction

Buying life insurance can be a little awkward. Nobody wants to think of his or her own death, or the death of a loved one. But just take a moment to think, “who would provide for your family if you were “out of the picture?”  The answer is life insurance. Purchasing life insurance today is the smartest move you can make to be sure that your loved ones will always be protected, even if you are not there to take care of them.

In this Guide we will explain the many different types of life insurance options available. We will help you determine the right type of life insurance for your family and your life circumstances. Throughout this Family Life Insurance Guide, you will find helpful tips and useful information about purchasing a life insurance policy. We will help you determine how much life insurance you need, and help you find a life insurance policy that fits your needs and your budget.

This Guide is not intended to endorse any particular type of life insurance or life insurance provider. Our intention is to help you make an informed decision about buying a life insurance policy.

Who Needs Life Insurance?

If there are people in your household who rely on your income, such as: a spouse, children, even aging parents, you need life insurance. A spouse, who is a full time homemaker, also needs life insurance. The family may not rely on that person for income; however life insurance can help the surviving spouse hire people to take care of the household and the children. Alternatively if they feel the need to leave work and now take up the role of housekeeper and caregiver, life insurance can provide the financial security to do so. Elderly couples who do not already have life insurance should also consider purchasing life insurance. This way, a surviving spouse does not have to exhaust retirement savings, or risk other assets, should they require medical or long-term care upon the death of a spouse.  

Before You Buy Life Insurance

Before you buy life insurance there are several things you need to consider. As mentioned above, carefully evaluate how many members of your family require life insurance coverage. Remember, even a spouse who is not earning an income may need to be covered. Think carefully about your life circumstances:

• Do you currently have children?
• Are you planning on having children or additional children in the near future?
• Are your children close to college age or already in college?
• Are you caring for elderly parents?

Painting as clear a picture as you can of your life circumstances will help you and your insurance agent determine the kind of life insurance that best fits your needs.

Now that you have an understanding of your life insurance needs, before you start shopping, check with your benefits administrator at work to see if your company offers or provides group life insurance. If they do, make sure it’s an adequate amount to suit your requirements. You may still need to supplement with an additional life insurance policy, even if you do receive life insurance on the job.   

What Kind of Life Insurance Do I Need?

There are basically two types of life insurance, Term Life insurance and Permanent Life insurance. Term life insurance is a death benefit only life insurance that is purchased for a specific number of years, usually 10, 20 or 30 years. Permanent life insurance is a policy that remains in effect for your entire life. Permanent Life insurance policies also have the additional benefit of accruing a cash value over the life of the policy. Examples of Permanent Life insurance are Whole Life, Universal Life and Variable Life.

Which type of life insurance is right for you is largely based on your life circumstances and your budget.  In general, Term Life insurance offers you the most in death benefit value for your monthly premium – but,  remember that Term Life insurance has no cash value, and pays out to your beneficiaries only if you pass away before the end of the term. If you have purchased a 30-year Term Life insurance policy, and die even 1 day after the 30 years, your family does not receive anything. So when figuring out the length of the term, be sure to carefully think about up to what age you believe your family would have had to rely on your income, and settle on the term accordingly. In Level Premium Term Life insurance polices, the premiums may be fixed and not increase for the period of the term, or a good portion of the term. Under most circumstances you can renew the term once it expires, even if your health circumstances have changed. However, be prepared for the premiums to increase. Ask your Term Life insurance agent in advance what the renewable rate will be at the end of the term.
Also be sure to ask:

• If there is an age at which the Term Life policy is no longer renewable?
• Once that age is reached, do I need to pass a physical exam to renew?
• Is there the option of converting to a Cash Value Life Insurance policy?

Often people will buy Term Life insurance specifically to cover a particular loan, such as a mortgage. This is a variation of Term Life insurance known as Declining Value Term Life Insurance. In this case the monthly premiums remain constant, but the term and the death benefit amount are tied to the life of the mortgage loan. The term is in effect until the mortgage is paid off, with the death benefit being only the remaining balance on the loan at the time of the death of the insured. 

The other types of Life Insurance are Cash Value or Permanent Life insurance policies. By their very nature Permanent Life insurance policies such as Whole Life insurance, cost more than a Term Life insurance policy with the same death benefit. This is because a portion of each month’s premium in a Whole Life insurance policy is invested by the insurance company in some type of interest earning, tax-deferred savings account. In this way a Whole Life insurance policy builds cash value. Over the life of the policy, you can borrow money against the accrued value. If the loan has not been paid back at the time of death, the amount of the loan will be deducted from the death benefit amount. On some Permanent Life insurance policies the cash value increases to the point where monthly premiums become unnecessary, and the life insurance policy effectively “pays for itself”.  The most common types of cash value or Permanent Life insurance are: Whole Life, Universal Life, and Variable Life 

• Whole Life – Remains in effect as long as you live and make the required payments. A portion of the monthly premium is invested in a savings account by the insurance company at a fixed interest rate. Often the premiums on a Whole Life policy are on a sliding scale, with larger premiums during the early years of the policy to build equity and cash value.
• Universal Life – Offers more flexibility than Whole Life. Investments are spread out over a variety of funds, with the potential for greater return. These funds are still selected by the insurance company. Death benefit amounts can be changed over time with most Universal Life insurance, unlike with Whole Life.
• Variable Life – Is much like Universal Life, but Variable Life insurance is the only life insurance product that allows you to determine how your investments are made. You get to choose the funds or stocks and bonds where your money is invested, and as such Variable Life is sold and regulated as a securities investment. Variable Life is risky. Your cash value and your death benefit may increase dramatically if you choose your investments well. But if they do poorly, value and death benefit can drop. Ask your agent for the option of a higher premium that would result in a guaranteed minimum death benefit. 

All Cash Value Life Insurance polices have some degree of risk, and potential returns on investments are not guaranteed. You should ask your life insurance agent for an illustration of how the policy would work over time as interest rates and other factors change.

There are a fair amount of financial professionals that feel it is best to keep your life insurance needs and your investment life separate. In their way of thinking there was a time, maybe a generation ago, when life insurance offered one of the only opportunities for the average investor. With the various tax-deferred annuity plans available to consumers today; that is just not the case. These financial advisors suggest that most people should purchase a Term Life insurance policy to protect their families and take the often-significant difference between that premium and a Whole Life insurance policy and invest it on their own.        

Whether you feel that Term Life or Permanent Life insurance better fits your life circumstances, you should also ask your life insurance agent about Accidental Death or Dismemberment Insurance. This can usually be purchased as a rider on any life insurance policy. It will increase your monthly premium; however it will pay at least double the death benefit to your beneficiaries if you die an accidental death, or are disabled due to the loss of limbs or eyesight.                    

How Much Life Insurance Do I Need?

Keep in mind that the primary reason to buy life insurance is to provide a means of paying your family’s living expenses without the benefit of your income. There are two important things to consider when evaluating how much the death benefit on a life insurance policy should be. You need to determine not only how much money your family will require every year in your absence, but for how many years they will need it.
Consider these questions carefully:

• Do you have children who will soon be entering or leaving college?
• Do you expect your spouse may soon remarry?
• Is there the possibility that your family will have to care for an elderly parent?
• Are there other family members or charitable organizations that you want to be able to leave money to? 

All of these current and future life circumstance questions need to be considered before you can accurately evaluate how much life insurance is enough.

Life insurance death benefits need to be enough to take care of three categories of financial responsibility beneficiaries will face upon the death of the insured:

• Loss of Annual Income
• Final Expenses
• Current and Future Debt

When considering how much money will be needed to replace your annual income experts suggest that you multiply your annual salary by at least 7 years, 10 years if you have children. Also when you are figuring out how to replace your annual salary, consider where you are in your career. Have you peaked professionally? Or is it reasonable to expect that your income will increase over the next 10, or 20 years – if so be sure to factor that in.

Then you need to add to this figure the amount of money for “Final Expenses.” Final expenses are not only the costs of a funeral, which have skyrocketed in recent years, $10 thousand to $12 thousand on average, but also the cost of any death or estate taxes. You can expect to need at least 10% of your total estate, payable immediately upon your death, to cover taxes. And finally you have to consider how much debt your beneficiaries will be left with upon your demise, and if you want them to have the ability to pay off that debt in one lump sum, or to continue to make payments on the mortgage, car loan etc.

A death benefit calculator can help you to determine the target amount for your life insurance policy. Speaking with an agent about your particular circumstances and budget is the best way to select the amount that is right for you.   

How Do I Get the Best Value for my Life Insurance Premium?

Once you have determined what type of life insurance is right for you, the best way to save money is to compare the rates on the same kind of policy from several different companies. The Internet is a great way to compare life insurance rates. Today you can get a free quote and advice on life insurance from many top-rated companies online.

Getting a low price is good place to start, but do not compare, or make your decision based on price alone. Always look at a company’s rating. Companies such as AM Best and Standard & Poor’s rate life insurance companies. Go with the lowest quote from the company with the highest rating.

Also when looking at one life insurance company’s quote vs. another’s, there are other factors besides price to consider:

• Does that premium remain constant from year to year?
• What parts of the policy are guaranteed?
• Compare policy details; are there special benefits that suit your needs?

If you are comparing cash value policies:

• How quickly does the cash value grow?
• What is the interest rate, and what is the impact of changes in interest rates?  

Don’t Pay More Than You Have To

Want to know the surest way to save money on life insurance? Buy healthy, and stay healthy. The lowest rates for life insurance policies, known in the industry as preferred or select rates, are given to people who are young and in good health and who have families with a history of wellness.

If you think lifestyle couldn’t possibly make that much of a difference when it comes to saving money on life insurance, think again. For example, if you are taking prescription medication for heart disease, hypertension, are grossly overweight or have diabetes – you will probability pay over 50% more than the preferred life insurance rates. If you smoke, be prepared to pay as much as double.

What you do for a living or the hobbies you enjoy also make a difference. If you are in a high-risk occupation such as a First Responder, expect to pay more for life insurance. If you enjoy risky sports like skydiving or scuba diving, you will pay more than preferred rates for life insurance.

Do not even think about lying on your application for life insurance and not telling the company about your medical issues or lifestyle. While it may be tempting to not disclose something that you know will drive up your rates, this is a big mistake that will only cost you far more in the long run.  Even if somehow you managed to get around the medical exams and other checks the company does before the policy is issued, it never pays to try to fool the insurer. Insurance companies investigate all claims before they pay death benefits. If for example, an insured dies of lung cancer, and they find out he was a smoker who did not say so on his application, the claim will be denied leaving his beneficiaries with little or nothing.

And as always, if you know that you will fall out of the preferred group and into one of the high risk categories – definitely shop around, and speak with an agent – they will know how to get you the most affordable life insurance coverage for your set of circumstances.  

Conclusion and Key Points to Remember

Life insurance is important to your finances, your security, and your family’s future.
Buying life insurance can be emotional. It makes you think of your own mortality, and it involves dealing with many lifestyle and financial questions and personal considerations. You need to be willing to discuss these with your spouse, and with a financial or life insurance professional. Today there are many options and many life insurance companies to choose from. Obtaining a free life insurance quote on the Internet is a great place to start.

Review of the Basics

• The most basic and affordable type of life insurance is Term Life insurance.
• Term Life insurance has no cash value.
• Some Term Life insurance policies can be converted to Whole Life. You should consider such a policy if you anticipate your needs changing over time.
• Permanent Life insurance policies such as Whole Life remain in effect as long as you live and make the required payments. A portion of your monthly premium goes into tax-deferred savings with all forms of Permanent Life insurance.
• Whole Life insurance and other types of Permanent Life insurance policies may not be your best investment path. Compare the rates given on Whole Life insurance policies with other investment opportunities. Consider a Term Life insurance policy and investing the difference in some other type of tax-deferred annuity plan.
• Universal Life has greater investment opportunities than Whole Life insurance, but is more risky.
• Variable Life is the only life insurance product that lets you choose how your money is invested, but carries the greatest degree of risk
• Premiums do not increase on Permanent Insurance policies. Death benefit and cash value can and do fluctuate.
• Base your Life Insurance needs on your requirements for replacement of income and your own personal preferences.

Points to Remember

• Always review all of your life insurance policy documents carefully before signing.
• Always answer all medical questions honestly and accurately.
• Review your life insurance policy with your agent or broker every few years.
• Carefully evaluate how much money your survivors would need from your life insurance and for how long.
• Determine whether you want a death benefit only term life insurance policy, or are you also interested in using life insurance as a means of savings or investment.
• Use the Internet to shop around for the best deal and obtain multiple free quotes.
• Read all policy documents carefully before making a purchase. Perhaps have them reviewed by your accountant or financial advisor.
• Always buy life insurance when you are youngest and healthiest.
• Use the Web to shop for free life insurance quotes.

A Glossary of Key Terms

Accidental Death Rider – a rider added to any life insurance policy that pays an additional death benefit if the insured dies of accidental causes.
Beneficiary -- The person, persons, or entity that is designated as recipient of the death benefit
Benefits - The amount of money paid and/or services provided under the terms of the insurance contract
Cash Value -- The portion of a life insurance policy that can be borrowed against or cashed in
Cash Surrender Value – The amount of money the insured receives upon turning in the policy, less any loans that may have been taken out on the policy.   
Convertibility -- Option to convert from a Term Life insurance policy to another type, typically without a physical examination.
Decreasing Term Insurance – A type of Term Insurance with a death benefit amount that decreases over time, tied to a collateralized loan, such as a mortgage. 
Face Value -- The original death benefit amount of the policy.
Indemnity – The idea upon which all life insurance contracts are based. Indemnity is the principal of returning the insured to the same position they were in prior to the occurrence of the insured event. 
Level Premium – A type of Term Life insurance where the premium remains fixed over the length of the term  
Paid Up -- A policy requiring no further premium payments due to prepayment or earnings.
Premiums -- Monthly, quarterly, or yearly payments required to maintain coverage.