Tomorrow’s Promise: The Basics of Life Insurance

Khezia
September 26, 2012

Unlike car or health insurance, life insurance isn’t obligatory. Millions of Americans see this safeguard against the uncertainties of the future as an expensive luxury that provides little practical benefit in the here and now. As such, they choose to forgo it and spend their money on items that provide short-term gratification. While there’s nothing morally wrong with this attitude, it often stems from outdated data and rumor-fed misinformation. Read on to learn how to make life insurance work in your favor.

A Massive Industry

Life insurance can seem like a complicated affair. According to the American Council of Life Insurers, the industry’s main trade group, there were 917 U.S.-based life insurance companies operating in North America in 2011. The Department of Veterans’ Affairs also provides life insurance through several quasi-public agencies. Taken together, the total value of life insurance policies currently in force in the United States approaches $20 trillion. That’s over 25 percent larger than the country’s current gross domestic product.

Term Life Insurance

There are two major types of life insurance: whole life and term life. Term policies remain in force for a pre-set period of time, typically 10 to 20 years. They have no cash value: Once the term ends, these policies expire. To remain insured, you’ll have to set up an entirely new policy. Although term life policies offer lower premiums than whole life policies, you’ll see a return on your “investment” only if you die during the covered term.

Whole Life Insurance

Often regarded as a low-yield investment vehicle, whole life policies remain in force indefinitely. Most insurers will allow you to borrow against the cash value of your policy. You can also cancel your policy at any time by “cashing out” and walking away with a significant payoff.

However, the value of whole life policies can fluctuate along with the broader financial markets. Unless you cash out your policy at the right time, the easiest way to secure a return on your investment is to let your family reap the benefits upon your death.

What to Consider Before You Buy

Before you pull the trigger and purchase a life insurance policy, you’ll need to consider a few things:

The financial strength of your provider. Standard & Poors, a leading credit rating agency, evaluates insurers’ balance sheets annually and assigns letter-grade ratings to each. ‘CC’ signifies extreme financial weakness while ‘AAA’ is reserved for the industry’s strongest firms.
Variable pricing. Now that most providers have a robust online presence, comparing life insurance quotes is easier than ever. Your quoted premiums will vary wildly between insurers, so shop at least a dozen providers to get a sense of the market.
Your family’s needs. There’s no point in paying for a life insurance policy that’s too small to cover your final expenses and maintain your family’s standard of living after you’re gone. Since the cost of your policy is spread out over many years, your wallet will barely notice even a substantial increase in its value.

Whether you prefer whole life, term life or a specialized product, life insurance is an important part of your family’s financial safety net. Talk to a trusted provider today and protect yourself and your loved ones against the unknown.

Jessica Larsen is a blogger who writes for AskForInsurance.com – an insurance questions and answers website where you can learn about topics such as what is the difference between term and whole life insurance.