Life insurance is meant to protect your
family in case you die. We all hope to live to a ripe old age,
to see our grandchildren marry and have children of their own,
and to share old age with our spouse. But life insurance is about
preparing for the unexpected. If you have dependents who rely
on your income, life insurance will probably be needed to provide
for them after your death. Consider these five asteps to ensure
you have the right life insurance coverage:
1. Determine how much
life insurance you need.
To decide, consider:
- What lifestyle do you want to provide
for your spouse and other dependents?
- How much will that lifestyle cost?
- Are there any special circumstances you
should consider, such as paying for a child's college education,
paying off a mortgage, taking care of elderly parents, or providing
for your spouse's retirement?
- What other sources of income are available
to pay for that lifestyle?
2. Decide what type of
policy you need.
Although there are a wide variety of
policy types, the two broad categories are term and cash value:
- Term insurance - With
term insurance, you purchase insurance protection only, with
none of the premium set aside to build cash value. Your beneficiary
receives the policy proceeds if you die during the policy's term,
but you get nothing if the policy is canceled.
- Cash-value insurance - Cash-value insurance accumulates, from premiums
paid and from investment earnings, a cash surrender value that
is your property. If you surrender the policy, you receive that
value. Furthermore, you can borrow against the cash value through
a policy loan, but any outstanding loans are subtracted from
the insurance proceeds when you die. A wide variety of cash-value
insurance policies exist, with numerous riders available to meet
specific needs.
3. Review insurance policies. Since
life insurance companies offer so many different options, it can
be difficult to compare several different policies. Try following
these steps:
- Compare only the same type of policy.
For instance, don't compare a term policy to a variable life
or whole life policy.
- Make sure the policies contain the same
options and riders.
- If considering permanent insurance policies,
review the assumptions used in the policy illustration, which
shows the policy's projected value at some time in the future.
Keep in mind that these illustrations are hypothetical and your
value will depend on the policy's actual performance. Obtain
illustrations based on three alternatives - the original illustration,
one with an interest rate 1% lower than anticipated, and one
with the minimum guaranteed rate.
4. Take the time to understand
what you are purchasing.
Life insurance policies are complex
documents. Make sure to read the entire contract, and get answers
to any of your questions. Don't sign the policy if you don't understand
its terms.
5. Periodically reassess
your policies. Your life insurance needs will typically change
over your lifetime. If you've married or divorced, had a baby,
or your spouse died or became disabled, you'll likely need to
change your life insurance coverage. Make time each year to reassess
your current life insurance policy.
