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Life Insurance

Insurance that guarantees a specific sum of money to a designated beneficiary upon the death of the insured or to the insured if he or she lives beyond a certain age. A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.

The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, you should consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments and college? It is prudent to reevaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business.

Life insurance is important for individuals as well, particularly those who — like many entrepreneurs — are not covered by a company's group plan. Experts recommend that every adult purchase a minimum amount of life insurance, at least enough to cover their debts and burial expenses so that these costs do not fall upon their family members.

TERM INSURANCE: Term life insurance is the simplest and least expensive type, as it pays benefits only upon the policy holder's death. With annual renewable term insurance, the policy holder pays a low premium at first, which increases annually as he or she gets older. With level term insurance, the premium amount is set for a certain number of years, then increases at the end of each time period. Experts recommend that people who select term insurance make sure that their policies are convertible, so they can switch to a cash-value plan later if needed. They also should purchase a guaranteed renewable policy, so that their coverage cannot be terminated if they have health problems. Term insurance typically works best for younger people with children and limited funds who are not covered through an employer.

WHOLE LIFE INSURANCE: With whole life insurance, the policy holder pays a level premium on an annual basis. The policy usually covers until the end of the person's life—age 90 or 100. In most cases, the policy holder is overcharged for the premium, and the extra amount goes into an interest-bearing dividend account known as a cash value account. The individual can use the money in this account to pay future premiums, or can withdraw it or borrow against it to cover living expenses. With a variable whole life policy, the individual controls the investments made with his or her cash value account. Selecting certain types of investments, such as mutual funds, may allow the policy holder to increase the balance in the account significantly. Regardless of the performance of the investments, however, the amount of the insurance benefit can never drop below its original value.

UNIVERSAL LIFE INSURANCE: Universal life insurance was introduced in the 1980s as a higher-interest alternative to whole life insurance. Universal life premiums are based not only on the cost of the insurance, but also on the interest rate offered on investments. Still, they are usually less expensive than whole life policies. Universal life policies provide individuals with a wider array of investment choices and higher projected interest rates. They are essentially similar to a term policy with a fixed rate of interest guaranteed for a year at a time.

CURRENT ASSUMPTION LIFE INSURANCE: Current assumption life insurance features a fixed annual premium for the duration of the plan. This type of policy pays a set interest rate on premiums received, less the actual cost of the insurance. They can be useful as a tax-deferred investment vehicle, since they usually pay 2 to 4 percent more than banks. Policy holders may elect to overpay their premiums early in the plan period to accumulate cash value. They can withdraw or borrow from the funds later for any purpose, including retirement income, or can use the cash value to pay the premiums for the remainder of the plan period.

RIDERS AND OPTIONS: Most types of life insurance policies give individuals the opportunity to add optional coverage, or riders. One popular option is accelerated benefits (also called living benefits), which pays up to 25 percent of the policy value to the holder prior to their death if they are struck by a serious illness. Another option, known as a waiver of premium, allows an individual to continue coverage without paying premiums if he or she becomes disabled. Many policies also provide an accidental death and dismemberment option, which pays twice the amount of the policy if the insured dies or loses the use of limbs as a result of an accident.

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