Insurance 101

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  • Understanding Life Insurance

  • Do you find the world of life insurance to be confusing?
    If you do you're in good company. In fact, studies indicate that 60% of consumers have shied away from securing sufficient life insurance because they don't understand it.

    That's really not as surprising as it may seem. With almost 2,000 companies selling a seemingly infinite variety of life insurance policies, the choices can seem overwhelming. However, there are some fundamentals that all life insurance policies share and understanding those basics can help you when making your buying decisions.

    Life Insurance Fundamental One
    Life insurance is first and foremost intended to provide financial security for individuals or entities that are dependent on someone else's continued ability to provide income. The need for continued financial resources can be for a fixed period, such as to pay a mortgage, discharge a business debt, or provide a college education for dependents. Or the need can be one that will last for an indefinite period. For instance, there may be a need to assure retirement income for a spouse, settle an estate, or guarantee that a business passes to one's heirs.

    Life Insurance Fundamental Two
    A second fundamental of life insurance is that almost all varieties of life insurance can be classified into two broad categories -- term and permanent. Term insurance provides life insurance protection for a specified duration of time. Permanent insurance is intended to last for a lifetime, regardless of when death occurs. Each category of life insurance has its own unique advantages and disadvantages, and what may be appropriate for one individual can be totally inappropriate for another person.

    That wasn't too bad, was it? Now let's go to the next step -- a basic understanding of some different types of term and permanent insurance, and some of the potential uses of each.

    Term Life Insurance
    Term life insurance typically offers relatively low-cost protection for anything from one, five, ten, twenty, or, in some cases, thirty years. Term insurance can be compared to renting a death benefit, because it pays a benefit only if the insured dies during the period specified in the policy. If the insured is still alive at the end of the period, coverage ceases. Term insurance doesn't provide such "living benefits" as cash values, and if premiums are not paid coverage lapses.

    As the name implies, level term life insurance offers a level death benefit for a certain period of time, often anywhere from one year to age 95 or 100. In addition, the policy owner can pay level premiums for a certain specified period of years, depending on the company and insurance policy offered -- anywhere from one to 30 years. Today, level premiums for the first 10 or 20 policy years are the most common options. Once the level premium paying period expires, premiums will increase annually. Many policy owners will find the cost of the annually increasing premiums to be quite prohibitive.

    Term insurance's strongest appeal is its early affordability. It is initially less expensive to purchase than is permanent insurance, so an individual can purchase larger amounts of protection per dollar of expenditure. It can be an especially suitable purchase for those who have a limited budget but need large amounts of coverage for a specific period of time. Examples include young parents with small children, people with high current obligations, or those who wish to use term insurance as an interim measure before converting to some form of permanent insurance.

    Permanent Life Insurance
    Permanent life insurance is an unrivaled value because it's versatile enough to resolve many of life's complex financial obstacles. Just a few of the objectives that permanent insurance can meet are: building an estate; paying death taxes; supplementing a retirement income; funding for children's or grandchildren's college education; safeguarding a business from the loss of a key employee; subsidizing a business transfer; providing a charitable gift; or equalizing inheritances.

    Well-known varieties of permanent insurance are universal life and whole life. As the word permanent implies, a typical universal life or whole life policy is intended to cover the insured for his or her entire life and pays a death benefit to beneficiaries whenever the insured dies.

    The premium the policy owner pays generally is split three ways. A portion goes to fund the cost of the future death benefit, part is used to cover the company's administrative costs, and the remainder goes into the policy's reserve account, better known as the policy's cash value.

    The policy cash value is an attractive feature of permanent insurance that can provide important tax-favored living benefits to the policy owner. Cash value earnings grow on a tax-deferred basis. The cash value can provide a source of cash for emergency or planned needs. If at some future date the policy owner no longer has the need for life insurance, the policy can be surrendered for its cash value. Better yet, the cash value could purchase an annuity for continued tax-favored treatment!

    Universal Life Insurance
    Universal life is also known as flexible premium adjustable life insurance because the policy owner can change the amount of death benefit and premiums more easily than with other forms of permanent insurance. Theoretically this allows one policy to fit the different needs of an individual throughout his or her lifetime.

    Another important universal life feature is the interest-sensitive nature of the cash value. This means the amount that can be accumulated varies according to the current financial environment. Although current rates reflect the present economic climate, the rates used can be no lower than a guaranteed rate specified in the particular policy.

    Universal life insurance is appropriate for the person who takes an active interest in managing his or her finances. With universal life insurance, the cash value and actual insurance costs are "unbundled." This important feature allows the interested policy owner to see exactly where every dime of the premium goes.

    Whole Life Insurance  
    Whole Life comes in many varieties, but the most popular is level-premium, level death benefit insurance. The greatest advantage of whole life insurance is its guarantees. In other words, as long as the policy owner pays his or her premiums, the policy is guaranteed to be there. You also have the option of purchasing whole life insurance with a single deposit. This means that only one premium is made but the cash value continues to increase even though no additional premiums are paid. In addition, the policy's cash values are not subject to the market risks associated with some other permanent life insurance products or investments like mutual funds. The cash values of a whole life policy may be available to the policy owner via policy loans or if the policy is surrendered by the policy owner.

    Some whole life is known as participating. This means policy owners participate in the favorable experience of the life insurance company through dividends. When dividends are paid, the policy owner may be given a choice of several different ways to use the dividends. For instance, they could be used to reduce current premiums, to purchase additional insurance, or to repay policy loans.

    With its strong guarantees, whole life insurance is good for the person who wants to be sure the policy is there, regardless of when death occurs. Whole life insurance is easy to understand, and it's an excellent choice for the individual who desires a disciplined approach to purchasing life insurance.

    You can begin the process of determining how much life insurance you need by performing a free life insurance needs analysis for yourself. The information is for your use only. We will not collect any of the data you enter, and you will remain anonymous.

    A Final Word  
    Hopefully, the information here has provided you with an understanding of the basic types of life insurance and some of the needs that insurance can fill. Your Farm Bureau Insurance agent is another valuable source of information. He or she has the knowledge and tools to help you to assess whether you need life insurance, and, if so, how much. Finally, your agent can help you choose the right type of life insurance for your personal needs.


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