Life insurance basics
If you’re thinking you should get around to buying life insurance, it may surprise you to learn that you may not need it. Here’s a review of what you should know.
For starters, understand that life insurance is meant to protect an income stream. If anyone, such as your children or your parents, depends on your income, life insurance can protect it. If you’re single or have no dependents, though, you probably don’t need life insurance.
Next, know that there are two main types of life insurance: “term” and “cash value.” With term insurance, your premium payments are applied entirely to the cost of the insurance, and coverage is easily stopped when it’s no longer needed (such as when your kids are selfsupporting). Term insurance is simple and effective.
Cash value insurance, meanwhile, encompasses whole life, universal life and variable life policies, among others. These combine term insurance with long-term, tax-sheltered savings plans. The most important thing to understand about these policies is that they’re designed to be held for life, and there are often significant upfront charges involved. These tax-sheltered savings can end up outperforming taxed investments, but that can take 10 to 20 years, and it isn’t always worth it.
Never opt for cash value insurance without doing a lot of homework. Don’t let an aggressive agent sway you with confusing presentations and emotional arguments. (“Think of your children!”) Remember that term life can last as long as you want, via guaranteed renewable policies. If you’re attracted to the investment portion of cash value insurance, know that you can always buy less-expensive term insurance and invest the difference on your own. You stand a good chance of outperforming the insurance company, too.
Don’t buy more insurance than you need or the wrong kind of insurance. You want to protect and replace the income stream that would be lost if you die, but you needn’t set up a lotterylike payout on your death. Learn more at bankrate.com/insurance. aspx.