How Should I Choose What Type of Life Insurance to Buy?

Life insurance is a long-term commitment. Before getting a life insurance quote, ask yourself these very important questions:

• How much insurance do I need? If I were to die, what would my spouse and dependents need in order to live comfortably?

• What am I trying to accomplish with life insurance? Am I accumulating funds for education costs? Providing a way to pay estate taxes? Do I need supplemental income for my retirement or emergencies?

• How much can I afford to pay for a policy?

After answering these questions and consulting with a life insurance agent, your next step is to choose which type of insurance best meets your needs.

Term Life Insurance

You should consider Term Life Insurance if:

• You need life insurance for a specific period of time. Term life insurance enables you to match the length of the policy term to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want insurance to repay a debt that in a specified time period, buy a term policy for that period.

• You need a large amount of life insurance, but have a limited budget. In general, term life insurance pays only if you die during the term of the policy, so the rate is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings. If you think your financial needs may change, you may also want to look into "convertible" term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

Term Life Insurance Advantages

Offers temporary life insurance protection at a very affordable price

May be converted to permanent policy

Income-tax-free death benefits

Permanent (or Whole) Life Insurance

You should consider permanent (or whole) life insurance if:

• You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or 100 years from now.

• You want to accumulate tax-deferred savings that could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you cannot pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky2. The death benefit is collateral for the loan, and if you die before it is repaid, the insurance company collects what is due before determining what goes to your beneficiary.
  
  Keep in mind that premiums for permanent policies are generally higher than for term life insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term premiums can go up substantially every time you renew.

Permanent Life Insurance Advantages:

• Lifetime protection.

• Tax-deferred cash value.

• Access to your cash value to use however you wish

"Locked in" premiums.

• Income-tax-free death benefits.

1Assuming policy does not lapse due to insufficient premiums paid. Death benefit is subject to a deduction of unpaid premiums during grace period and any outstanding loan balances past the grace period.

2Borrowed funds are generally subject to an interest rate.

This article adapted from information provided by the Insurance Information Institute.