Last month I explained the
value of insuring your earning potential or your "money
machine," because of its value to your family. Ironically, many
people must be persuaded to buy life insurance even though the
eventuality is certain. At least I don't know of anyone, except maybe
Elvis, who has beaten the terminal nature of life.
So, if we have settled the argument that your death will indeed
occur, and we can agree that, without your ongoing income, those you
leave behind will suffer some shortcoming, the next question you might
have is, "What kind of life insurance should I buy?"
I am inclined to answer that this would depend largely upon your
current life situation (dependents, mortgage, etc.), the amount of
coverage you need, the amount of money you want to spend and the length
of time you need the coverage to continue.
Your insurance agent can assist you by leading you through a basic
needs analysis. This will include your funeral expenses, an assessment
of how much debt will be left behind, and whether or not all or some of
this debt should be immediately retired. Additionally, you may wish to
include an allowance to offset your survivors' ongoing living expenses
for a period of time (i.e.: until your youngest child reaches 18 or
completes college).
The next step is to answer the question of which type - Term or Cash
Value insurance? In most cases, the answer is made for you. Your need
may be so large that the only way you can afford to meet it is by
purchasing lower-premium term insurance. You may find, on the other
hand, that your need is so small that you could choose to buy cash value
insurance with its fixed premium for the rest of your life.
Essentially, these are the two basic forms of life insurance. Term
insurance, which is often referred to as "pure insurance," and
cash value insurance, is often called "permanent insurance."
Term policies provide life insurance coverage for a specified period
of time. You generally buy term insurance for a limited number of years.
If you die during the policy period, your beneficiary receives the
policy death benefit. If you don't die during the term that you have
this policy, your beneficiary receives nothing.
At the point in time when either the policy is dropped or becomes
unaffordable due to your age, your coverage simply ends. Some polices
include a provision that they are guaranteed renewable, regardless of
your health condition. Once you reach about 70 years of age, you may
find it difficult to get term insurance coverage for more than one year,
and it would be expensive.
A level term can be 1, 5, 10 or even 20 years with a fixed premium,
but each longer period has a higher premium. Whereas a decreasing term
can have a fixed premium for 15, 20, or 30 years, but a decreasing death
benefit.
Cash value or "permanent insurance" combines a death
benefit with a savings component (the cash value). As long as you
continue paying your premiums, cash value life insurance continues
throughout your life, regardless of your age or your health.
The insurance company typically invests the cash value, which
continues to grow - tax-deferred - as long as the policy is in force.
You can borrow against the cash value, but unpaid policy loans will
reduce the death benefit received by your beneficiary. If you surrender
the policy before you die (i.e., cancel your coverage), you may be
entitled to receive some or all of the cash value. Cash value life
insurance comes in many different types including whole life, variable
life, universal life and variable universal life.
You might consider Term insurance as "If" insurance. It
will cover you if you die during the term you have the policy - but your
need for a large amount of death benefit exists for normally a short
period of time (20 to 30 years). I call Permanent insurance,
"When" insurance. As long as you pay its normally fixed
premium, it will be there for "when" you die. Statistically
for most of us, this won't occur until well after the age of 70, but the
amount that we need then may not nearly be so large. In the meantime, do
as Spock advised, "Live long and prosper."
Russell Janecka is a Certified Insurance Counselor. He is the owner of Janecka Insurance Agency in Victoria, and serves on the board of directors with Germania Insurance Companies. (361) 573-4475 e-mail: info@jiavic.com
