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Life Insurance Continued


Another point that may help you better understand insurance is that Whole Life insurance is based on Term insurance. Term insurance is cheaper than Whole Life because the insurance company provides coverage over a shorter period of time, which lessens their cost as it is less likely that the insured person will die during this narrow time-frame. So, because it is a cheaper type of insurance, it forms the basis for ALL insurance. That's right. Term insurance is the foundation of all life insurance policies.

Another feature used to market Whole Life insurance is the "savings account" that is attached to such policies. In addition to providing the insured person's dependents with the face coverage amount of the policy, there is also cash which gets deposited into a separate account that is associated with the policy. Insurance companies, like almost all companies, are the business of making money, not giving it away. So, where do you think the cash value money comes from? The cash value is extra money that you have paid to the insurance company above and beyond the premium for term insurance that they are saving, on your behalf, for a rainy day. The money in the associated savings account is ostensibly there to offset the cost of insuring you in the future when you are older and insurance costs more. You pay more than you need to when you are younger and the cost to insure you is lower when you are older. See how this works? As you get older and more likely to die (and more expensive to insure), your whole life premiums stay constant, because the extra money it costs to insure you as an older person is withdrawn from the savings account that you paid into when you were younger.

One of the reasons that insurance companies like to have you pay into a whole life savings account is that they get to invest the money you put in there, and keep a large portion of the profit they make. They may make a 10% return on your money but only return 5% to your savings account. If you were to have carefully invested that money yourself, you would have been able to keep the full 10% return for yourself. This is not possible once you pay the money into a whole life policy, however.

There are many types of Whole Life coverage. Universal Whole Life puts a wrinkle in basic Whole Life by investing the cash value in stocks and bonds. The stated benefit is that the cash value will earn better returns than the cash value account in regular Whole Life policies. Although this sounds appealing, you have no control over where the cash value is invested. Moreover, since the cash value is invested in mutual funds, there are fees that erode any investment returns. This is not a good option.

Another product called Variable Life insurance. This type of insurance is kind of like a pay-as-you-go cellular phone because the premium amount is not fixed. If you are a little short on cash one month, you can pay less. Or, you can pay more if you have more money than you expected. The problem with these policies is that the face amount is not fixed. It also varies according to how much you have paid in premiums. This whole notion is risky considering that you are depending on a fixed face amount to protect your family if you die.

Beyond the few types of Whole Life insurance cited above, there are many different life insurance variations available from your local insurance agent. The one you should concern yourself with is Term Insurance, which is the best kind of life insurance to purchase. Term insurance is cheaper than whole life policies because with a term policy, you only pay for coverage during the time period that you would need that coverage (e.g., during the period of time when your children are dependent on your family for support). There is no savings account with a term policy. You pay only for to maintain the policy itself. The money you save on premiums is money that you can use to invest and enrich yourself, or to pay off debt.

Now that you have an understanding of what kind of life insurance to get (most experts agree that for most people it's Term Insurance), there is still the issue of how much coverage you need. There are no hard and fast formulas to determine the amount of coverage that makes sense for your family. You need to decide how much money your family will need to pay off any outstanding debt you have, to pay for living expenses, to fund your children's education, and possibly to help the surviving spouse fund retirement. It might take a small or large sum of money to accomplish these goals, depending on your financial situation. Because of the complexity of these decisions, you are best off seeking the counsel of professional financial and insurance advisors. There are many insurance agents who offer Term Life insurance. Find an agent who sells Term Life exclusively. Do not buy immediately, however. Comparison shop amongst agents to get good information and prices. Additionally, you can seek out the services of an insurance broker who represents many different insurance companies. A broker has more to offer you than an agent representing only one company because the broker will represent multiple companies. Warning: brokers and insurance agents alike may suggest coverages that pay them the largest commissions rather than the coverages you actually need. Be careful and aware.