Wednesday, September 29, 2010

Confused by Life Insurance? Here's Help

You know why you need life insurance -- to keep a roof over your family's head, to pay off debts and the future education of your children -- but when it comes to making a decision, it isn't always easy.

Life insurance is confusing. Here's some help to sort out the different policies so you can buy the best possible policy to protect your family.

What are the Major Types of Insurance?
Life insurance falls into two major categories, protection and investment. Term insurance is for protection. In the event of death, the beneficiary gets a lump sum of money. This is what most people think of when considering life insurance.

Investment life insurance plans are those called 'whole life', universal life', and 'variable life'. The main purpose of these plans ore to increase the money you make in payments.

Let's look at these separately but before we do, here are some words you need to know:

Beneficiary - the person who receives the money when you die.
Premium - the amount you pay for the insurance. You can pay this fee monthly, quarterly, or yearly.

Term Insurance
Term insurance is temporary giving you protection for a certain amount of time - 5, 10, 15, 20, 30, or 40 years. It gives your beneficiary a lump sum of money when you die. This type of insurance is recommended if you're under 40-years-old and don't have a history of premature death in your family.

Pros: The premium is usually cheaper than other types of insurance. If you die, your family has money to make house payments, pay off debts, and pay for children's education or whatever the needs may be.

Cons: When the time period for the policy is up, you don't get anything in return for all your payments. Premiums for Term insurance increase as you age.

Whole Life Coverage
This type of insurance is permanent. You have protection, usually to 100 years of age unless you don't pay the premiums. With whole life insurance, you build cash value. Part of the premiums you pay build up the savings.

Pros: Your payments stay the same. If you sign up for whole life insurance at a young age, you might build up enough money to stop making payments.

Cons: The company invests your payments for you. You can't choose how to grow the money. Whole life plans aren't flexible but stay the same for your entire lifetime. If your insurance needs change, you may have to consider additional insurance.

Universal Life Coverage
Universal life insurance is the more flexible form of Whole life. With Universal, part of your premiums are invested by the insurance company with a usual rate of 4% guaranteed return.

Pros: Let's you change your policy as your needs change and lets you choose between more or less expensive premiums.

Cons: If your premiums are too small for too long, you lose coverage.

Variable Life Coverage
This insurance allows you to invest part of your premium into a separate account for investments. This means that the amount of life insurance and the cash value can change. Your beneficiary receives a guaranteed minimum amount of money at death but there isn't a guarantee on the cash amount.

Pros: You can invest money without paying taxes until you give up the policy. You can apply the money you earn in interest toward paying the premium.

Cons: You are responsible for the investment of your money. If your investments lose money, you have less money to pay the premiums and it may be too expensive for you to keep.

Choosing the Best Policy
Only you know which policy is best for you and your family. There are many things you need to think about before choosing such as your age, health, debt, income, plans for your children.

Now that you have a beginning knowledge of life insurance, you can weigh all these factors against the pros and cons of each type of insurance and make the choice best for your family.

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