It’s your life: Or is it?
A beginner’s guide to life insurance
The concept of life insurance first came to the United States in the 18th century, during colonial times. Over the next 280 years or so, a number of products and services developed into the complex choices we have today. Mutual Insurance companies, which are owned by their members, as well as traditional corporations, which are responsible to the shareholders.
So why do you need it? Well, if you are indigent, homeless, and have no heirs, you probably have other priorities. You’ll never live to see the money anyway, right?
That’s because life insurance isn’t something you buy for yourself. It’s about taking care of your family. That doesn’t mean just paying for your funeral expenses, it means paying any final medical bills and debts, too. And oh, yes, you won’t be getting a paycheck anymore if you are dead. That could cause your surviving spouse and children some problems.
You may hear the words, “Leaving a legacy.” This doesn’t mean using your life insurance proceeds to make your family rich, far from it. But the family farm or small business you worked so hard to build and leave to your children might have to be sold if you die early.
There is an encyclopedia full of different products out there, it seems that every company has a different menu, but for the most part, there are two categories: policies you keep for the rest of your life, and those you dont.
Temporary policies, called “term” insurance, is the most common, and least expensive. The simplest form of this is annual term, which is a basic agreement that if you die in the next year, the company pays up, but if not, they collect your premiums and you walk away. If you choose to continue the policy, then your premium for the next year is re-negotiated. The older you get, the more expensive it gets, and the company may choose to refuse to renew if you develop a medical or psychiatric condition. A variation is “level-term,” where the amount of the premium is set for a specified number of years, usually five or ten.
Mortgage or credit insurance is a special kind of term. The premium is a set amount, but the insurer agrees to pay off the amount of the loan, which declines over time as you pay it off.
Permanent policies also come in all shapes and sizes. Whole life is the simple option. You pay a set premium that never changes. The policy not only pays a death benefit, but accumulates a cash value that you can borrow against, cash in later, or trade for a different policy.
Universal policies, in simplest term, are a combination of an insurance product and an investment. They are a permanent, cash-value building product, but are very flexible, giving you the option to adjust the premiums and the payout. The investment portion is tied to financial markets.
So how do you know which one of these products is right for you?
What is your income level, and how much of it will you need to replace? Is there a debt that your survivors would need to pay off if you weren’t around?
How old are you, and are you healthy? Your age will affect your premiums, and your health may affect the number of options you are offered. An agent will not offer you a million dollar policy if you are dying of jungle fever.
While most people shop for their own policies, it is not unusual to take out a policy on another person, but you have to have a financial interest. Spouses can take out policies on each other or their children, and you can insure a business partner.
You can even insure your dog. Although not meant for Fido the family mutt, owners of show dogs who have invested a sizeable sum in training and grooming, may seek some protection for that investment, just in case the next door neighbor hits him with his car.
There are many places to buy these products. While they are available on the Internet, unless you know exactly what you need, it is best to consult with a professional insurance agent or financial planner.