Your life insurance needs will depend on a number of
factors, including whether you're married, the size of your family, the nature
of your financial obligations, your career stage, and your goals. Life insurance is not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.
A note about variable life and variable universal life
Variable life and variable universal life insurance policies
are offered by prospectus, which you can obtain from your financial
professional or the insurance company. The prospectus contains detailed
information about investment objectives, risks, charges, and expenses. You
should read the prospectus and consider this information carefully before
purchasing a variable life or variable universal life insurance policy.
Protecting Your Loved Ones with Life Insurance
How much life insurance do you need?
Your life insurance needs will depend on a number of
factors, including the size of your family, the nature of your financial
obligations, your career stage, and your goals. For example, when you're young,
you may not have a great need for life insurance. However, as you take on more
responsibilities and your family grows, your need for life insurance increases.
Here are some questions that can help you start thinking
about the amount of life insurance you need:
- What immediate financial expenses (e.g., debt repayment,
funeral expenses) would your family face upon your death?
- How much of your salary is devoted to current expenses and
- How long would your dependents need support if you were to
- How much money would you want to leave for special
situations upon your death, such as funding your children's education, gifts to
charities, or an inheritance for your children?
- What other assets or insurance policies do you have?
Types of life insurance policies
The two basic types of life insurance are term life and
permanent (cash value) life. Term policies provide life insurance protection
for a specific period of time. If you die during the coverage period, your
beneficiary receives the policy's death benefit. If you live to the end of the
term, the policy simply terminates, unless it automatically renews for a new
period. Term policies are typically available for periods of 1 to 30 years and
may, in some cases, be renewed until you reach age 95. With guaranteed level
term insurance, a popular type, both the premium and the amount of coverage
remain level for a specific period of time.
Permanent insurance policies offer protection for your
entire life, regardless of your health, provided you pay the premium to keep
the policy in force. As you pay your premiums, a portion of each payment is
placed in the cash-value account. During the early years of the policy, the
cash-value contribution is a large portion of each premium payment. As you get
older, and the true cost of your insurance increases, the portion of your
premium payment devoted to the cash value decreases. The cash value continues
to grow--tax deferred--as long as the policy is in force. You can borrow
against the cash value, but unpaid policy loans will reduce the death benefit
that your beneficiary will receive. If you surrender the policy before you die
(i.e., cancel your coverage), you'll be entitled to receive the cash value,
minus any loans and surrender charges.
Many different types of cash-value life insurance are
- Whole life: You generally make level (equal) premium
payments for life. The death benefit and cash value are predetermined and
guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance
company). Your only action after purchase of the policy is to pay the fixed
- Universal life: You may pay premiums at any time, in any
amount (subject to certain limits), as long as the policy expenses and the cost
of insurance coverage are met. The amount of insurance coverage can be changed,
and the cash value will grow at a declared interest rate, which may vary over
- Indexed universal life: This is a form of universal life insurance with excess interest credited to cash values. But unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
- Variable life: As with whole life, you pay a level premium
for life. However, the death benefit and cash value fluctuate depending on the
performance of investments in what are known as subaccounts. A subaccount is a
pool of investor funds professionally managed to pursue a stated investment
objective. You select the subaccounts in which the cash value should be
- Variable universal life: A combination of universal and
variable life. You may pay premiums at any time, in any amount (subject to
limits), as long as policy expenses and the cost of insurance coverage are met.
The amount of insurance coverage can be changed, and the cash value and death benefit goes up or
down based on the performance of investments in the subaccounts.
With so many types of life insurance available, you're sure
to find a policy that meets your needs and your budget.
Choosing and changing your beneficiaries
When you purchase life insurance, you must name a primary
beneficiary to receive the proceeds of your insurance policy. Your beneficiary
may be a person, corporation, or other legal entity. You may name multiple
beneficiaries and specify what percentage of the net death benefit each is to
receive. If you name your minor child as a beneficiary, you should also
designate an adult as the child's guardian in your will.
What type of insurance is right for you?
Before deciding whether to buy term or permanent life insurance, consider the policy cost and potential savings that may be available. Also keep in mind that your insurance needs will likely change as your family, job, health, and financial picture change, so you'll want to build some flexibility into the decision-making process. In any case, here are some common reasons for buying life insurance and which type of insurance may best fit the need.
Mortgage or long-term debt: For most people, the home is one of the most valuable assets and also the source of the largest debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance for the length of the mortgage. If you die before the mortgage is paid off, the term life insurance pays your beneficiary an amount sufficient to pay the outstanding mortgage balance owed.
Family protection: Your income not only pays for day-to-day expenses, but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of 20 years or longer can take care of immediate cash needs as well as provide income for your survivor's future needs. Another alternative is cash value life insurance, such as universal life or variable life insurance. The cash value accumulation of these policies can be used to fund future income needs for college or retirement, even if you don't die.
Small business needs: Small business owners need life insurance to protect their business interest. As a business owner, you need to consider what happens to your business should you die unexpectedly. Life insurance can provide cash needed to buy a deceased partner's or shareholder's interest from his or her estate. Life insurance can also be used to compensate for the unexpected death of a key employee.
Review your coverage
Once you purchase a life insurance policy, make sure to
periodically review your coverage; over time your needs will change. An
insurance agent or financial professional can help you with your review.