Insurance Q&A

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Thursday, June 26, 2008

Getting the right Life Insurance

Q: "I need life insurance. What's the best way to shop around? "

"I'm 29, and my wife and I just had a baby! I need life insurance. What's the best way to shop around? I've seen many families that either had no life insurance or own the wrong type of life insurance."

It's great that you are taking a step to protect your family.
The first thing you need to do is understand the different types of life insurance out there.
There are two basic types of life insurance.
The first type is called "cash value life insurance." They go under the name as whole life, universal life, variable life, or a mixture of those words together.
Cash value life insurance is a term insurance plus a savings attached to it. Whole life insurance is a level term to age 100, Universal life insurance is an increasing term insurance (that means the insurance goes up internally every year) to age 100, and Variable life is also a level term to age 100, but the death benefit may increase if there is growth in the cash value. If you see the word "Variable" it means that a portion of your premiums is invested and when you are investing, you must know that there is no guarantee that there will be growth.
All cash value life policies provides protection to age 100.
But the bad news is that they are generally expensive to the average consumer and most people who buy these types of life insurance are under-insured (meaning they don't have enough coverage).
Majority of cash value life policies have a low rate of return. They usually average around 3%. The highest I ever seen was 6%. The lowest I ever seen was 1%. If you ever wanted to take money out of the cash value, you will have to borrow it and pay a loan interest on it (usually around 8%).
In some life policies, the cash value is included in the death benefit, but you have to pay more premiums to get this feature.
The second type of life insurance is known as "term insurance."
Term insurance does not build cash value, therefore premiums are very low. You can buy lots of coverage for a low amount of premiums.
There are level term policies that are as short as 1 year (you want to avoid these) and as long as 35 years. Longer term is always better since it will give you enough time to build wealth for your future.
Right now, you probably have a mortgage to pay, you have a child to take care of, and you probably have some other personal debt such as credit cards. You probably don't have much saved right now, so the need for life insurance is very high. If you die tomorrow, not only would it be emotionally devastating, it will also be financially devastating.
Which will have a longer impact on the family, their emotional loss or financial devastation?
The financial devastation because without life insurance, your child may not be able to afford college, the family will have to move out to a cheaper place, and your personal debt may go toward your spouse.
In the later years, your kids grow up and maybe move out of the home, your mortgage gets paid off, and hopefully you don't have much personal debt. So the need for life insurance is very low. You are nearing retirement, so you better have lots of money saved.
Buying term now will provide the right amount of protection needed to protect your family's income. At the same time, you want to start investing toward your future.