Life insurance is one of those things in life that many people don't want to talk about or deal with. After all, in order to collect on a life insurance policy, someone has to die, and for most people death is an unpleasant topic.
But life insurance should be high on your priority list, especially if you have a spouse and/or a family who is dependent upon your income to live and survive. Just like other types of insurance (auto, homeowners, etc.), life insurance can be difficult to understand. Take the time to learn the basics of life insurance, and suddenly everything will become a lot clearer to you.
There are two types of life insurance policies available:
- Term insurance - This is the easiest and least expensive type of policy to purchase, and has been designed to serve one purpose: to protect your dependents if you die. It is also the least expensive type of insurance, and if your cash flow is scarce, this type of policy is for you. The only problem, though, is that term life insurance gets more expensive as you get older. If you do opt for this type of policy, try to find one that keeps the premiums as low as possible for the first 20 years. Pay attention to the fine print, too, because many term insurance policies have a fixed life span, and when the time is up, your policy is no longer in effect.
- Cash value insurance - This type of insurance is more expensive and comes in a variety of forms. They include:
- Whole life - Combines the protection offered by term insurance with a savings aspect. A portion of each premium is invested on behalf of the policyholder.
- Universal life - This is similar to whole life in that it allows you to build up a cash value for your policy while offering flexibility to the policyholder. You can buy additional insurance with the built-up cash value if you want to.
- Variable life - This type, which is similar to universal life, comes in two varieties: straight and universal. (See how complicated it can become?) With straight variable life, annual premiums are fixed, while universal variable life allows the policyholder more flexibility regarding payment of the premiums.
If you do purchase term insurance, most of the policies will allow you to convert to a cash-value policy sometime in the future. Find an insurance agent you trust and make sure you get everything explained in ways that you understand. Life insurance can be confusing, but it can be understood.
See also: Retirement Planning and Mutual Funds