Monday, March 14, 2011

How do you know if your life insurance is doing its job?

How do you know if your life insurance is doing its job?

Life insurance is a complicated subject, filled with hidden pitfalls to those that don't understand it's ins and outs, which makes it hard to know just what to do.

For example, there are many different types of life insurance.  The simplest product is 'Term' life insurance:  you pay a specific premium to insure your life for a specific period of time.  But as you age that premium rises sharply.

Other forms of life insurance combine insurance with an investment feature.  The idea behind 'Whole' or 'Universal' life insurance is that you make a higher but flat payment to the insurer.  The extra money you pay each quarter is invested so that it will accumulate in what is called the 'cash value' of the policy.  And then, when you are older that money will cover the higher insurance premiums you would have otherwise paid.  Whole life policies guarantee the premiums and benefits for the duration of your life and are more expensive, Universal life policies don't so they are cheaper.

But the devil is in the details.  Whole and Universal life prices are based upon rate of return assumptions made by the insurance company.  For whole life policies this doesn't matter because the insurance company has guaranteed the benefit but for universal life policies this can be a major issue because if rates of return go low enough, the cash value in your policy will be used to 'top up' the insurance premium.  In these types of policies the money that was supposed to be set aside for later in your life can be used up quickly, forcing you to pay much higher premiums to keep your policy.

Newer products give you more flexibility while keeping premiums low:  you can  lock in your benefit for a specific period of time or can choose different investment vehicles for the cash value portion of the policy.  These 'variable' policies offer buyers more flexibility while still achieving the core insurance goal.

The bottom line is that you have many premium, investment and benefit options to choose from.  Choosing between them is an integral part of your financial game plan.  It's our job to help you make the right choice.

So, how do you know if your life insurance is doing its job?

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