Insurance Advice Corner


Purchasing Life Insurance



Purchasing life insurance is an important decision for both you and your family. Your family status, number of dependents, income and wealth all play a role in determining the amount of life insurance you need.

Your need for life insurance varies with your age and responsibilities. The amount of insurance you buy would depend on the standard of living you want for your family in the event of the death of a wage earner. Life insurance is intended to bridge the gap between the financial needs of your dependents and the amount available from other sources. The Human Life Value Insurance calculator analyzes the amount of life insurance needed.

Analyze Your Need For Life Insurance
One approach to determine how much life insurance one should carry is to analyze the various needs of the family in the event of the death of a wage earner. Life insurance satisfies a number of these needs by providing a fund that can be used to:
  • Pay off an individual’s last debts such as medical bills and funeral expenses
  • Meet estate taxes and other expenses in settling an estate
  • Pay off a mortgage on a home
  • Pay for the children’s education
  • Provide funds for retirement
  • Provide income for the spouse and to give the family time to readjust to a new standard of living
Provide a monthly income until the children are grown and out of school

More from the


Advice Corner

Life Insurance Basics

  • Economatic Whole Life. An economatic whole life policy provides for a basic amount of participating whole life insurance with an additional supplemental coverage provided through the use of dividends. This additional insurance usually is a combination of decreasing term insurance and paid-up dividend additions. Eventually, the dividend additions should equal the original amount of supplemental coverage. However, because dividends may not be sufficient to purchase enough paid up additions at a future date, it is possible that at some future time there could be a substantial decrease in the amount of supplemental insurance coverage. Use this insurance calculator to determine the amount of life insurance coverage needed.
  • Limited Payment Whole Life. If you want to pay premiums for a limited time the limited payment whole life policy gives you lifetime protection but requires only a limited number of premium payments. Because the premiums are paid over a shorter span of time, the premium payments will be higher than under the whole life plan.
  • Single Premium Whole Life. Single premium whole life is limited payment life where one large premium payment is made. The policy is fully paid up and no further premiums are required. Many such policies have substantial surrender charges if you want to cash in the policy during the first few years. Since a substantial payment is involved, it should be viewed as an investment-oriented product.
Ads

Interest Sensitive Whole Life. While insurers guarantee stated benefits on traditional contracts far into the future based on long-term and overall company experience, they allocate investment earnings differently on interest sensitive whole life in order to better reflect current fluctuations in interest rates. The advantage is that improvements in interest rates will be reflected more quickly in interest sensitive insurance than in traditional; the disadvantage, of course, is that decreases in interest rates will also be felt more quickly in interest sensitive whole life. There are four basic interest sensitive whole life policies:

Universal Life The universal life policy is actually more than interest sensitive as it is designed to reflect the insurer’s current mortality and expense as well as interest earnings rather than historic rates. Universal life works by treating separately the three basic elements of the policy: premium, death benefit and cash value. The company credits your premiums to the cash value account. Periodically the company deducts from the cash value account its expenses and the cost of insurance protection, usually described as the mortality deduction charge. The balance of the cash value account accumulates at the interest credited. The company guarantees a minimum interest rate and a maximum mortality charge. Some universal life policies also specify a maximum basis for the expense charge. These guarantees are usually very conservative. Current assumptions are critical to interest sensitive products such as Universal Life. When interest rates are high, benefit projections (such as cash value) are also high. When interest rates are low, these projections are not as attractive.

Universal life is also the most flexible of all the various kinds of policies. Because it treats the elements of the policy separately, universal life allows you to change or skip premium payments or change the death benefit more easily than with any other policy. The policy usually gives you an option to select one or two types of death benefits. Under one option your beneficiaries received only the face amount of the policy, under the other they receive both the face amount and the cash value account. If you want the maximum amount of death benefit now, the second option should be selected.

You generally pay a planned premium designed to keep the policy in force for life, and accumulate cash value, based upon the interest and expense and mortality charges you assume. It is important that these assumptions be realistic because if they are not, you may have to pay more to keep the policy from decreasing or lapsing. On the other hand, if your experience is better then the assumptions, than you may be able in the future to skip a premium, to pay less, or to have the plan paid up at an early date.

Insurance MarketPlace