Life insurance seems straightforward at first glance. You pay a certain amount of money each month, and, if you die, your beneficiaries get a specific sum of money. On the surface life insurance is really that simple, but, once you delve deeper, life insurance is more than just a death benefit.
There are two main forms of life insurance: whole life, or permanent life insurance, and term life insurance. There are a number of sub-categories in each that will cater to specific situations, but the fundamentals are the same. The nuances between the two have already been discussed in the article Understanding Term Life Insurance vs. Whole Life Insurance, but how is a person supposed to know when to buy term and when to buy permanent?
Permanent life insurance is used to solve a permanent need. Even for those who are not subject to estate taxation, they will have permanent needs. Funeral costs, leaving an inheritance, and living expenses for the survivor are just a few. The cost of permanent insurance is relatively high. Coming in at a rate of 5 to 10 times that of term insurance, whole life often is typically used in smaller dollar amounts. The benefit is, of course, the insurance will be there when it is needed.
Term life insurance, on the other hand solves a temporary need such as repaying a mortgage or paying for a child’s college education. For a young family, the breadwinner will often need substantial insurance to cover these important obligations in the event of his or her untimely death. Several hundred thousand dollars of death benefit can be picked up for under $50 per month. Once the temporary need has passed, the term life insurance coverage can be dropped. With many term policies, however, the cost increases each year. So as the insured gets older, it will become increasingly expensive to maintain the same amount of term insurance.
In order to figure out the right mix of how much permanent insurance a person should buy, he or she must analyze his or her needs. Figuring out in the long term what income the survivors will need, how much inheritance to pass along, and approximate funeral costs will help them to determine an ideal amount of death benefit
Most people will need a mixture of whole life and term insurance. A reputable agent for good company will help a person to find the right mixture. Finding the right company is as easy as doing a little internet research. In order to get the best deal on premiums, a person should stick to the best companies out there. In the end if all you can afford is term insurance, there is nothing wrong with that. With a policy underwritten by a reputable insurance company, the term can often be converted to permanent without any additional underwriting.