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What You Should Know About Buying Life Insurance

Life Insurance is the foundation of financial security for you and your family. It protects your financial resources against the uncertainties of lie so you can plan for the future.

Choosing a life insurance product is an important decision, but it can be complicated. As with any major purchase, it is important that you understand your needs and the options available to you.

The American Council of Life Insurance (ACLI) has prepared this guide to help you know what questions to ask when you're buying life insurance.

The ACLI is a trade association of more than 500 life insurance companies, which collectively provide about 90 percent of the life insurance in the United States.

Why do I need life insurance? The main purpose of life insurance is to provide cash to your family after you die. The money your dependents will receive (the "death benefit") is an important financial resource: It can help pay the mortgage, run the household, end ensure that your dependents aren't burdened with debt. The proceeds from a life insurance policy could mean that they won't have to sell assets to pay outstanding bills or taxes. What's more, there is no federal income tax on life insurance benefits.

Where do I Begin? Start by evaluating your family's needs. Gather all your personal financial information and estimate what your family will need after you're gone. Include ongoing expenses (such as day care, tuition or retirement) and immediate expenses at the time of death (like medical bills, burial costs, and estate taxes). Your family also may need funds to help them readjust... perhaps to finance a move, or pay expenses while job hunting. Remember, life insurance provides financial protection. If protection is not your primary goal, you should consider other financial products

How much life insurance will I need to purchase? While there's no substitute for evaluating needs, one rule of thumb is to buy life insurance equal to five to seven times your annual gross income.

What are the different types of life insurance? There are many kinds of insurance, but they generally fall into two categories: term insurance and permanent insurance.

What is term insurance? Term insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the term -- which can be from one to 30 years. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for the lower rates.

What is permanent insurance? Permanent insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, this may be the wrong type of insurance for you.

Permanent policies are known by a variety of names: whole, ordinary, universal, adjustable and variable life. Most have a feature known as "cash value" or "cash surrender value." This feature, not found in most term insurance policies, provides you with some options.

• You can cancel or "surrender" the policy -- in total or in part -- and receive the cash value as a lump sum. If you surrender your policy in the early years, there may be little or no cash value.
  
  
• If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime.
  
  
• You can usually borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit

• Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest
• It's good for covering needs that will disappear in time, such as mortgages or car loans.

• Premiums increase as you grow older.
• Coverage may terminate at the end of the term or become too expensive to continue.
• The policy generally doesn't offer cash value or paid-up insurance.

• As long as the premiums are paid, protection is guaranteed for life.
• Premium costs can be fixed or flexible to meet personal financial needs.
• The policy accumulates a cash value against which you can borrow. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash value to pay premiums or use the cash value to provide paid-up insurance.
• The policy's cash value can be surrendered -- in total or in part -- for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's lifetime or a specified period.)
• A Provision or "rider" can be added to a policy that gives you the option to purchase additional insurance without taking a medical exam or having to furnish evidence of insurability
  Disadvantages:
  • Required premium levels may make it hard to buy enough protection.
  • It may be more costly than term insurance if you don't keep it long enough.
  After you have though about your financial needs and become familiar with the basic types of life insurance, it's time to choose a company and agent.