How should I choose what type of life insurance to buy?
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 term policy 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 the insurance to repay a debt that will be paid off 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, this type of insurance pays only if you die during the
term of the policy, so the rate per thousand of death benefit 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.
You should consider permanent 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 live to be 100.
You want to
accumulate a savings element that will grow on a tax-deferred
basis and 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 can’t pay them
otherwise, or it can be used for any other purpose you choose.
You can borrow these funds even if your credit is shaky. The
death benefit is collateral for the loan, and if you die before
it’s repaid, the insurance company collects what is due the
company before determining what’s goes to your beneficiary.
Keep in mind that premiums for permanent policies are generally
higher than for term insurance. However, the premium in a permanent
policy remains the same no matter how old you are, while term can go
up substantially every time you renew it.
