Your guide to: Buying Life Insurance

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Basic information that every new parent should understand

When a new baby comes along, you and your spouse will probably want to make sure that if something should happen to either one of you, the baby will be financially secure. It is popular for new parents to get life insurance for peace of mind. You should have a basic understanding of the different types of life insurance.

Another important part of choosing life insurance is determining how much insurance you really need. There are a few popular ways of figuring out how much life insurance to get. One way is to get between 5 and 10 times your annual salary. Homemakers should get life insurance, too. If something should happen to the homemaker, it would cost a lot of money to hire a housekeeper, babysitter, cook, party planner, chauffeur etc.

Homemakers should get life insurance, too.

You can also determine your unique income replacement needs as they may vary greatly depending on your age. So, if you are have a young family, your family would probably need a larger amount of life insurance to sustain them through the years. If you are an older person, your family probably would not need as much life insurance to cover expenses.

You can determine how much you currently spend by figuring out how much your family spends. This is your net income, after taxes, minus how much money you haven't spent. You will want a death benefit amount which will cover this expense. You can also add one-time expenses like paying for your child's college education, funeral costs, medical costs, etc.

Anyone who is looking for life insurance should be working with a professional who not only understands life insurance but also investments such as their 401k, mutual funds, stocks and other investments. All these issues should be reviewed when looking at the right kind of insurance as well as the amount of insurance necessary.

Term Life Insurance

Term insurance is a more affordable life insurance than many other choices. It is generally the cheapest form of life insurance for people under age 50. The younger you are, the cheaper it will be. A term policy can last from 1 to 30 years, depending on the insurance company. You can usually renew the policy at the end of the term.

Basically, you buy life insurance for a certain price each month or each year and the policy lasts a certain amount of time. If the person that has the life insurance dies in that amount of time, the beneficiary gets the money from the life insurance policy. If the person dies after that amount of time, the insurance policy doesn't pay anyone anything.

The premiums increase over time and there is no cash value component. We recommend considering a term policy that is renewable and convertible to whole life.

Declining Balance Term

This is a variation of term life insurance.This kind of life insurance is still an affordable option, but has no cash value. The amount of the life insurance is only paid if you die during the policy's term.

This particular kind of insurance is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines because your will owe less on your home over time. Once the mortgage on your home is paid off, the policy expires. This kind of insurance is not as widely available as other options. It is typically offered by your mortgage lender, and the cost of it can accumulate to be more expensive than other options.

Whole Life Insurance

Unlike term and declining balance term life insurance, whole life insurance offers a cash value accumulation component along with permanent protection. Whole life insurance is also more expensive than term life insurance. This is because you are not only paying for life insurance, but also for an investment of your money. The investment can be in bonds and money-market instruments or stocks, or a combination of both. As the investment builds value, you can borrow money from the investment. Borrowed amounts reduce the death benefit and cash surrender value.

Sometimes, whole life policies are considered "forced savings policies" because it forces you to save money, and it works much like a retirement plan. Whole life insurance policies might earn dividends.

Whole life policies also come with a guaranteed cash value, so if you choose to cancel the policy, you would get the guaranteed cash value. The amount of your guaranteed cash value depends on the kind of whole life policy you have, its size, and how long you have had it.

Under current federal income tax law, the growth in cash value in a whole life insurance policy is tax deferred.

As with term life insurance, you can lock in the same monthly payment for whole life insurance over the life of the policy.

Adjustable Life Insurance

Adjustable life insurance is one kind of whole life insurance. The best thing about adjustable life insurance is that it gives the policy holder numerous options in terms of premiums, face amounts, and investment objectives. For example, the components of the policy can be changed in response to changing needs and circumstances.

You normally choose the face amount you need and the premium you want to pay, and the company calculates a plan that provides coverage for your request. The resulting adjustable plan can be a personalized form of term life insurance or whole life insurance.

Variable Life Insurance

This is another kind of whole life insurance. With variable life insurance, the face amount and cash value of a policy rely on the investment performance of a special fund. Reserves are placed in investment accounts that are separate from the company's general account. Most policies guarantee a minimum face amount, but a cash value minimum is rarely guaranteed.

Universal Life Insurance

Universal life insurance was developed from whole life insurance. One benefit of purchasing a universal life insurance policy is that besides accumulating a tax-deferred savings, one may not have to pay premiums during the entire policy. If money to pay the death benefit and other related costs accumulates in the tax-deferred savings portions of the policy, then premiums may eventually not be required to keep the policy in force.

Essentially it is a way to invest while having life insurance policy. People most likely to benefit for this kind of life insurance are people who feel like they would need life insurance into their 70s. This is because the savings portion would have enough time to accumulate into an investment. If this is not needed, it might be more beneficial to get a term life insurance policy and a separate retirement investment savings account or 401(k).

With most companies, you will need to have the policy in force for at least 15 years to be eligible for any return of the policy. Also, you will need to have a knowledgeable insurance agent to go over all the details with you.

After you have a basic understanding of these different kinds of life insurances, you can make a more informed decision on the amount and life insurance type you need for your family's needs.

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