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How To Use Life Insurance For Your Family

Procrastination is something that we all have in common; often it is as innocent as continually putting something off until a later date. However, in the case of life insurance putting it off until later could be a devastating decision for your loved ones. While we know that many people between the ages of 30 and 50 lack a will, information gathered over the past year tells us that many lack life insurance too.

This past March, a survey from Genworth Financial and the University of Virginia’s Darden School of Business found that almost 70% of single parents and 45% of married parents were living without any coverage (1). This follows the 2010 study of Trends in Life Insurance by the Life Insurance and Market Research Association (LIMRA), which indicated that 44 percent of American adults are opting to go without life insurance. Additionally, LIMRA’s study revealed in 2010 that 30 percent of U.S households have no coverage compared to 22 percent of households that were without coverage in 2004. Most concerning was the 11 million households with children under age 18 who did not have life insurance (2).

Why don’t more young adults own life insurance? With the challenges that so many are facing due to the recent economic turmoil, often times life insurance is pushed down the priority list. Also, shopping for life insurance may seem confusing, boring, or unnecessary especially for those between 30 and 50. Still when you have children, get married, buy a house and/or live a lifestyle funded by significant salaries of one spouse, the need for life insurance is undeniable.

Choosing the right policy. There are two basic types of life insurance: term and permanent. Technically, cash value or “permanent” life insurance policies offer death benefits and some of the characteristics of an investment – a percentage of the money you spend to fund the policy goes into a savings program. In the 90’s there was an explosion of new products (Variable Life) where insurance companies offered customers the ability to invest the savings portion of these policies into the stock market by using options very similar to mutual funds. By the way almost all of these products promised stock market like returns and in nearly every case have failed miserably. Traditionally the cash value/savings portion of permanent policies are invested by the insurance company and pay a fixed interest rate (subject to change due to market conditions).

All of these types of permanent policies require higher premiums than term policies. Term policies provide you insurance coverage for periods ranging from 10 to 25 years in most cases and can be a great choice for many young adults or others that need coverage for a specific time period and because it is relatively inexpensive. Now the downside to term life coverage is considerable; if you outlive the term of the policy, your loved ones do not receive the death benefit. In fact, years ago the state of New York passed a law to prevent persons age 70 and above from purchasing term policies, as the purchasers frequently outlived the coverage period after paying significant premiums during the term. Term life policies can be renewed (though many are not) and some can be converted to permanent coverage (3).

The key questions are: How long do you need coverage? What is the amount of coverage you need for beneficiaries (both children & spouse)? And of course what can your cash flow support.

Often today life insurance is presented by insurance professionals like an investment and it is not. Life insurance is first to provide for burial & funeral expenses, second replace lost income from a working spouse that is necessary to maintain the family including paying off debts, third as part of an estate planning tool it can help leave a legacy for family or charities.

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The way you answer the key questions will guide you towards your true need for permanent vs. term life insurance coverage.

Term can be cheap but remember your need. Premiums on 10-year level guaranteed term policies are startlingly affordable. Just to give you a example, a 40-year-old woman in excellent health could potentially line up $250,000 in coverage through one major insurer for a premium of $16 a month in August 2011 (4).

Still, if you have insurance needs beyond the term period then strongly consider not neglecting them to save dollars in the short term.

Review, Reflect then Decide. The internet is one tool that you can use to search and compare insurance policies, yet with the myriad of companies and types of coverages offered professional assistance is also a good option. So use them both, talk with a financial or insurance professional you can trust and do some research on your own before you buy that next policy. That professional can perform a term-versus-permanent analysis for you and help you weigh per-policy variables or perhaps show you a cost effective way to combine the two types of coverage.

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