Buy Only the Life Insurance You Need; Save With Term Life Insurance

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Why might I need life insurance? Some people find themselves in the uncomfortable situation of being badgered by an aggressive life insurance agent who has finagled his way into their home.

His goal is to convince them that they can't go one more minute without his company's insurance policy. Finally, after hours of being subjected to confusing jargon, the person gives in just to get the agent out of their home. They have absolutely no idea what the coverage or objective of the policy they just purchased is.

You can avoid this type of situation by thoughtfully planning ahead as to the type of life insurance coverage that might be best for you and your family. Only then should you shop around and get a life insurance quote.

To determine what type of life insurance coverage your family needs, ask yourself these simple questions:

1. Is it to replace lost household income? In the event of a deceased spouse, life insurance can provide funds to replace lost income. If both spouses earn an income, it might be a good idea to carry life insurance on each person. Especially if both incomes are crucial to support the household.

   Amount of death benefit should be enough to yield annual interest earnings to match or replace the lost income, while leaving the "principle" amount untouched to continue earning interest. This can get a little complicated, since nobody can accurately project what interest rates will be at a future date.

2. Is life insurance coverage to provide funds to pay off mortgages? Life insurance can provide the means to pay off a mortgage on your home or other property in the event of the untimely death of the income provider for the household. This avoids risk of loosing the home, and placing the financial burden of the mortgage on the surviving spouse.

3. Should the life insurance policy provide for retirement? Many people use a whole life insurance policy to provide funds for retirement. Whole life insurance policies insure for a specified death benefit amount, and build a "cash value" that accrues through the years.

   When the insured spouse reaches retirement age, the "life" of the policy is outlived, and the cash is withdrawn from the policy for retirement use. Withdrawing the cash terminates some policies, while others may provide some type of death benefit as long as premium payments are continued. However, these type life insurance policies may not be the best choice for accumulating retirement funds. More about that later.

4. Should the life insurance provide for college education? Some households use life insurance to provide college education for the children, either in the event of a death benefit, or through cash value accumulated in a whole life insurance policy.

   Some parents and grandparents purchase life insurance policies for their children or grandchildren so that a cash value will be made available when the child reaches college age.

5. Should the life insurance provide for unforeseen health issues? Sometimes a life insurance policy is taken out on an infant or child. If they developed health problems when they were older, it would be difficult to acquire coverage at that time. By already having coverage in effect, they remain insured as long as premium payments are made.

6. Is the life insurance to protect a business partnership? It is not unusual for business partners to carry life insurance on one another. In the event of a death, the surviving partner would be financially capable to continue on with the business venture, and pay off any mortgage or debt obligations the partnership may have entered into.

So Many Companies, So Many Policies – Which One is Right for Me?

When shopping for life insurance, it is best to select only from companies with a high industry rating. There are several rating standards, all of which take into account the performance record, the amount of insurance in force, and the accumulated capital holdings of the company. Only companies with a B+ to an A++ rating should be considered.

Whole Life Insurance

Whole life insurance is a type of policy that provides a specified death benefit. It accumulates a cash value as the policy matures through the years. Part of the premium goes toward the "mortality cost," or the actual cost of covering the insured for the specified death benefit amount. The rest goes toward the cash value accumulation of the policy.

Standard whole life insurance usually is not a very efficient use of your life insurance dollar. This is because substantial policy and administrative fees are taken from your premium before it ever gets to your account. Furthermore, the interest rates used to accumulate the cash value of these type policies are usually at a ridiculously low rate.

Universal Life Insurance

Universal life insurance is a type of whole life policy that insurance companies developed in the 1980s. It was a move to re-capture business being lost by consumers cashing-in and dropping their standard whole life policies, in order to invest the funds elsewhere for a much higher return.

Universal life insurance, sometimes also known as flexible life or variable life builds cash value much like standard whole life, except the interest rates used to accumulate the cash value are based on current market interest rates, and fluctuate accordingly.

Although universal life policies use the higher market interest rate to accumulate cash value, universal and standard whole life policies have a bottom line guaranteed rate. It is usually lower or equal to the rate acquired in a simple bank savings account. Not the most efficient way to accumulate funds for later use.

Whole life and universal life insurance policies also have "hidden" costs that the policy holder may not be aware of. Many companies have annual or monthly administrative fees and commissions that are taken from the premiums or cash value.

Insurance agents push the whole life and universal life policies because they get a much higher commission. Sometimes the entire first year premium goes to agent commissions, and no cash value is accrued for one, or occasionally two years, even though the consumer has paid the full premium.

Insurance companies statistically have a poor history of investment prowess, and usually have a poor return from capital in their control. The bottom line is that consumers who want to accumulate a cash account can get a much better rate of return elsewhere.

Term Life Insurance

Term life insurance is bare-bones coverage for a specified death benefit amount with no cash value accumulation. The price of the premium is the actual mortality cost, plus whatever administrative fees the insurance company assesses the policy.

Term life insurance can be purchased in several forms, to best suit the individuals needs. Level term provides the specified death benefit amount with the insured paying the same premium amount throughout the term of coverage. Typical term lengths are 5, 10, 15 or 20 year level terms. The longer the term, the higher the premium to offset the rising mortality risk of older age.

An older person seeking term insurance might want to acquire a policy that is guaranteed convertible. This means that if they still need coverage at the end of the term they can convert to a different policy within the same company, even though their health may have declined.

Another type of term life insurance is guaranteed renewable term; renewed each year at a higher premium. Premium rates vary greatly from one company to another. The frugal consumer shops around for a term life insurance quote that best suits their needs.

Conclusion: Term Life Insurance is the Best Buy!

Whatever the individual needs may be, term life insurance is usually the best buy for the premium dollar. The consumer is only buying the coverage required for their situation, not lining the pockets of the insurance company or agent with their hard earned cash. Cash that could be more wisely invested at a much higher rate of return than in cash value life insurance policies.

One final word; the best part of life insurance is the hope that a beneficiary will never have to collect on it!