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Y's Ways to Fiscal Fitness
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Personal Financial Planning
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After you’ve determined how much coverage you need, your next question
is: What kind?
Although it may seem that there are as many types of life insurance policy
as there are species of insect, there are really just two basic categories:
term and cash value insurance.
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TERM INSURANCE
Because of its no-frills coverage, term insurance is usually much less
expensive than cash value insurance. Many experts recommend term insurance
if you’ll need coverage for ten years or less.
Buying term insurance and putting your savings into a separate investment
account can also give you more control over your money.
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TERM TERMS
Decreasing term insurance pays a higher death benefit at
the beginning of the term and little towards the end. Premiums remain
the same throughout.
Level premium term insurance pays the same death benefit
throughout the term. Premiums remain the same throughout.
Renewable term insurance automatically qualifies you to
renew at the end of the term without having to prove you’re
in good health. However, premiums are based on age and get higher
every time you renew.
Convertible term insurance lets you convert your coverage
to a cash value policy without proof of good health.
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CASH VALUE INSURANCE
Cash value insurance, also known as permanent insurance, uses your premium
dollars to pay for four things: life insurance coverage, administration
and fees, commissions, and the policy’s cash reserve.
The cash reserve is your money. If you cancel the policy, you get the
balance back, minus any surrender fees, as the cash surrender value.
You can also borrow against the balance at low rates. However, if you
don’t pay it back, the loan will reduce the payout to your beneficiaries.
If you’ll need life insurance coverage for a long time, cash value
insurance may be right for you, since premiums will not go up as you get
older. Even if your health deteriorates while you hold a cash value policy,
your premiums stay the same.
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THE THREE FACES OF CASH VALUE INSURANCE
Whole life, also known as straight life, lets you
pay the same premiums for the length of the policy. In the beginning,
premiums are generally higher than they would be for an equivalent
term insurance policy, but they never change.
Universal life allows you to vary the amount of premium
from year to year. For example, you could choose to pay more than
the minimum premiums early on because you want to pay lower premiums
in retirement. You can also choose to increase or decrease the death
benefit. Because of this flexibility, universal life often involves
higher fees and administration costs.
Variable life gives you some control over how your cash
reserve is invested. The insurance company offers a selection of
accounts, and you allocate your cash reserve among those options.
However, the value of your cash reserve depends on how well your
accounts are performing. Your death benefit fluctuates too, although
the policy will set a guaranteed minimum for the death benefit.
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GET GROUP COVERAGE
If you can get group life insurance coverage, it’s usually
much less expensive than individual coverage. Many group policies
let you buy a substantial amount of coverage before they require
proof of good health.
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