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  • Marla Roeser

How To Choose Life Insurance

In brief, life insurance is a contract between you and an insurance company. You agree to pay a monthly or yearly premium and the company commits to paying a death benefit to the people you choose. Life insurance comes in many flavors:

  • Term life insurance is a policy for a set length of time, often between 10 and 30 years. There is no cash value unless you can convert it.

  • Whole life insurance has a set premium, and you can take the cash value while you're still alive.

  • Universal life insurance offers investment options.

  • Convertible life insurance policies allow you to start off with a term life insurance policy and convert it to a whole life policy.

Cost may influence your purchasing decision. Term policies tend to be cheaper for young people and for those who are in good health. While whole life policies can be kept for life, can build up cash tax free and can be borrowed against, there are high fees and commissions built into these plans, as well as surrender charges if you cancel the policy, often leaving little or no cash value years after you take out the policy. Depending on your choice and situation, you may have to take a medical exam.

In your ruminations about which plan to choose, consider the benefits of having life insurance of some kind:

  • You'll have financial security and peace of mind for your family or spouse.

  • Beneficiaries can use the funds from life insurance as they need.

  • Fixed premiums help you budget.

  • Some plans let you build savings through investments or borrow money from the life insurance policy later in life if needed.

However, you should also consider these possible drawbacks:

  • For term life, after the term is up and if the death benefit is not paid, any money paid into the policy is lost.

  • For whole life with cash values or universal life, investment options don't yield returns as high as other assets.

  • Plans are canceled if you don't pay the premium. You have to take out a new plan that may cost more.

How much life insurance will you need? Some financial planners say you need enough to replace five to seven years of your salary. In reality, however, you have to consider a variety of scenarios in deciding how much to buy:

  • Would your spouse work after your death? How much does your spouse make and how long will your spouse work?

  • Do you need to provide money for school or college?

  • How much debt do you have? Do you want to cover this, too?

  • Will your plan be used to pay loans, medical bills or mortgages?

  • What investments and savings do you have now?

A life insurance professional or financial advisor can help you decide how much coverage you need and ways to keep monthly or yearly costs down. Your age and medical condition, as well as the amount of your policy's death benefit, whether you want term or permanent insurance and if the policy has a cash value are all factored into cost, as are your budget, risk tolerance and discipline as an investor. Also, there are other options and subtleties that may affect your choice.

Life insurance needs change over time as your life changes. Review your coverage to make sure you have the right plan.

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