Define Life Insurance Terms

Life insurance provides your surviving dependents with finances to help them when you die. If you are single, or one-half of a two-income, no-dependents household, you probably won't need much life insurance or any at all. With some planning, you can set up a low-risk savings fund to cover funeral costs, and invest the money that you would have paid for life insurance premiums.

On the other hand, if you are the primary breadwinner of the houshold and/or have children or other dependents, then you probably need a life insurance policy. Life insurance is designed to protect your family and the other people who might be depending on you for financial support. If you die and they lose your income, the dependents will lose that income and financial support, so life insurance can help cover some or all of those losses depending on the type of policy you choose.

Children do not normally need life insurance. Young, single people may not need it or get an amount that will take care of burial and debt expenses, but it is usually cheaper. The elderly also do not normally need a life insurance policy above what would be needed to cover burial expenses and a cash payout for the survivor to help pay immediate expenses. A policy for an older person is going to be more expensive.

Established families, married couples and those with dependents are usually the ones who need the largest policies. You want these people taken care of if something happens to you.

No specific formula is uded to determine how much life insurance coverage one needs. A simple way to figure out how much you would need is to get 7 times your annual income. An example is a family with an income of $60,000 might need at least $420,000 worth of life insurance coverage. But some insurance experts feel you may need as much as 10 times your annual income.

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Term life insurance is probably the most popular form of life insurance coverage. It is low priced and the easiest to understand. The premiums vary depending on your age, but they are the same throughout the policy coverage. It begins with a physical exam. It is purchased for a set number of years. This type of insurance does not build cash value and will pay out a lump sum. This amount is set when the policy is purchased.

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Whole life insurance is usually used when the life insurance coverage is needed for life, or permanentlt. Plus it has a built-in savings element since when you pay your premiums, it wil build up a cash value on a tax deferred basis within the policy. But withdrawals will reduce the value of the death benefits. Although premiums are fixed for whole life insurance they can be much higher than premiums you would pay initially for the same amount of term insurance, but they are eventually smaller than the premiums you would end up paying if you were to keep renewing a term insurance policy until your later years. Whole life insurance can be a good choice for you if you want to have a life insurance policy in effect for your entire lifetime and can afford paying the premiums, and/or if it fits within your choices of an estate or retirement plan.

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Universal Life Insurance offers the low-cost of term life insurance and a savings element, like whole life insurance. Your money is invested to provide a cash value buildup. You choose the investment vehicle, which is usually only bonds and mortgages, and both your investment and its returns are placed into a cash account. You then can, unlike whole life, choose to use your accumulated cash to pay the premiums or just let it build up. The death benefit or policy payout, savings amount and your premiums can be reviewed and changed as you, the policyholder's circumstances change.

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Variable life insurance gives you a permanent policy similar to universal life insurance. This type of insurance is generally the most expensive type of cash value insurance. It allows you to invest a portion of your premium dollars in a broad variety of stocks, bonds, equity funds, money market funds and bond funds that the insurance company uses. Beneficiaries will receive the policy's face value amount, or that amount plus the value of your investments account.

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There are various methods employed to find out which is the best insurance house to get a policy from. You could use parameters such as sales, revenues, number of policies, coverage, premium and benefits to rate various insurance companies. These are probably the largest companies in the U.S.

MetLife
Prudential
New York Life
American International
Mass Mutual Financial

This lense is for information only. The owner is not an insurance agent and does not give advice. Always check with a professional first before making any financial decision.