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Information on Life Insurance |
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For many of us, life insurance is about replacing the financial contribution made by a member of our family.
Life insurance can be pure insurance, or cash value insurance. The former pays only on the death of the insured while the latter also has a savings vehicle. The majority of life insurance holders prefer the pure insurance as they can save for retirement through other means.
Life insurance covers three types of expenses: 1) replacement of the policyholder's earnings; 2) estate taxes and 3) burial costs.
Consider the following when you are not certain about the amount of insurance to buy,
- Most of the life insurance should be on a member of your family whose pay makes an important contribution to the family budget.
- For a stay-at-home parent, a relatively small life insurance policy to cover child care and other expenses is recommended.
- Life insurance on children is a waste of resources. It’s better to buy life insurance on other family members for the benefit of the children
- If possible, pass on credit life insurance and mortgage life insurance because these plans are limiting and costly. Alternatively, buy more general life insurance.
- As you build more financial assets, you may want to reduce the amount of life insurance you have applied for.
- To replace what a family member is earning, you should buy about 12 times the amount of money you would need each year. For instance, if you would need $50,000 a year to replace the salary of a deceased family member, you would need a $600,000 policy.
- If you are single and don't have anyone depending on you, give up the idea of life insurance altogether. If you wish to spare your family of burial expenses, a small policy that covers only this aspect can be taken out.
The two popular forms of life insurance are:
Term life insurance : This is the most basic and cheapest for people under 50 years. Here, you build up no equity or cash value. An annual sum is paid for the cost of insurance and this amount typically decreases as you age. Most of these term policies are renewable on an annual basis.
Whole life insurance : This type is typically sold with a level premium. It offers permanent protection with an added savings component. The annual premium will be higher than comparable term insurance in the early years of the policy. But due to the fact that premiums are level, annual premiums of this type may turn out to be less than term. As the policy matures, it’s possible to borrow up to 90% of the policy’s cash value, tax-free. |
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