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Life Insurance Basics

Navigating types of life insurance

Life insurance is one aspect of American life that makes us skeptics shake our heads and wonder about paying out good money for something that we hope we´ll never need. Statistically, most of us won´t need it, so why buy life insurance? How can we get a reasonable deal, meet our insurance objectives, and avoid wasting money on unnecessary or inappropriate insurance solutions?

By the simplest possible definition, a life insurance policy, for which premium payments have been paid as agreed upon according to the terms of the contract, pays out to your beneficiary upon your death the value of the policy. From your viewpoint, the biggest advantage to carrying a life insurance policy is peace of mind knowing that in case of your untimely demise, your nearest and dearest will be clothed, shod, fed, and educated so they can make their way in an uncertain world with at least a minimal financial buffer to protect them. From their viewpoint, in your absence, they will have the means to make any necessary adjustments with somewhat less misery than if they would if not provided for.

In our current culture, life insurance is important. It ensures a meaningful degree of continuity in the event of loss and grief. But how do you ensure that you´ll be able to protect your family by the best possible means? The first decision you make about life insurance will probably be whether you want short-term coverage for a specified period or long-term, permanent coverage.

Term Life Insurance

With term life insurance, coverage pays off if needed during a specific time period.

Insurance Type Advantages Disadvantages
Term Life
  • Low initial premiums provide greater coverage for the money
  • Good for covering large loans such as mortgages or auto loans.
  • Premiums increase with age
  • Coverage may terminate or become too expensive to continue.
  • No cash value.

Permanent Insurance

Permanent life insurance is purchased as a long-term policy that may serve as not only an insurance policy but depending on type, as an investment vehicle as well.

Insurance Type Description Advantages Disadvantages
Whole Life
  • Most common policy type. Premium payment and schedule remain the same for the life of the policy.
  • Policy is good for life as long as premiums are paid.
  • Costs can be tailored to individual needs.
  • You may be able to borrow against the cash value of the policy, though this type of loan must be repaid with interest.
  • The policy may be surrendered for either a lump sum payment or an annuity payment.
  • Policy may include provisions to increase policy without requiring a medical exam.
  • Required premium levels may be to high to buy desired protection.
  • May be more expensive than term insurance if not kept long enough.
  • Other long term investment options may be more desirable.
Universal / Adjustable
  • Once initial payment has been made, additional payments maybe paid in any amount at any time (subject to the terms of the agreement)
  • It´s often possible to reduce or increase the benefit more easily than with traditional whole life policies.
Variable
  • Provides benefits based on performance of the investment portfolio.
  • Cash value is not guaranteed.
  • Some policies guarantee that death benefits can´t drop below a certain point.

To get the best policy for your needs, you´ll need to find a good insurance agent who can answer your questions and guide you to the best possible solution. Life insurance is complicated by the variety of policies available so it will help to talk to an expert.

Information provided by Deschutes Insurance

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