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Life insurance is an important financial
resource for your loved ones when you die. At a
minimum, you should purchase enough to pay for
your debts and final expenses. Ideally, you should
have enough life insurance to allow your survivors
to invest the insurance benefit and use the
interest generated as an additional income source
after debts and final expenses are paid. Online
tools can help you determine how much life
insurance is right for you.
Use the
How Much Life Insurance Do You Need? Work Sheet
as a guide to calculate your needs.
Life insurance can be an important tool for:
- Replacing your income
for your spouse, children or others who may
depend on it.
- Creating an inheritance
for your heirs.
- Paying state or federal
estate taxes.
- Contributing to a charitable organization or other worthy cause.
| Plan |
Description |
| Term insurance |
- Provides only a death
benefit in most cases.
- Covers you for a period
or term equal to a specified number of years or
until you reach a specified age. Beneficiaries
receive payment only if you die during the
policy term.
- Provides the largest
immediate death benefit for the lowest cost for
adults under age 45. After age 45, premiums rise
sharply.
- There are three types:
- Level term means the
premium and/or benefit amounts stay the same
throughout the duration of the policy.
- Decreasing term means
the death benefit decreases with time; the
premium generally stays the same.
- Renewable term means your coverage automatically renews at the end of each term, regardless of changes in your health or occupation. At renewal, the premium may increase while the death benefit usually stays the same.
- Most term policies offer the ability to convert to permanent life insurance. Some life insurance companies charge a fee for this flexibility. Conversion can be a good benefit for those who desire long-term insurance coverage.
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| Permanent insurance |
- Combines a death benefit
with a cash value — part of your premium is
diverted into a cash value element that builds
over time and helps you avoid paying higher
premiums in later years.
- Covers an individual up
to age 95, 100 and sometimes longer. By 2009,
many insurance companies will offer policies
that provide coverage to age 121. If you cancel
coverage, you receive any accumulated cash
value.
- May allow you to borrow
or withdraw some of your cash value as long as
premiums are being paid. This reduces the death
benefit.
- There are several types:
- Whole life offers a
death benefit with a cash value and sometimes
dividends. The premiums and death benefit remain
constant, while the cash value grows at a
guaranteed fixed rate. You do not pay federal
income taxes on the cash value until you receive
it.
- Universal life offers
more flexibility than a whole life policy. You
may be able to increase the death benefit. When
your cash value reaches a certain level, you may
be able to alter your premium payments. The cash
value grows at a guaranteed minimum interest
rate on a federal income tax-deferred basis.
- Variable universal life is similar to universal life, but it allows you to select the investment vehicle that generates your cash value growth.
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About PremiumsThe
amount you pay for a life insurance contract can
vary widely among life insurance companies. You
should compare similar policies based on your age,
the coverage amount and the type of policy and its
features. Premiums are based on your insurability
and risk class — generally determined by the
following factors.
| Age |
Younger individuals pay lower rates, as they tend to be healthier and have longer to pay premiums before they are likely to die.
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| Gender |
Women, who as a group have longer life expectancy than men, typically pay lower premiums.
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| Lifestyle |
Your use of nicotine and alcohol, as well as your hobbies, may affect your premiums. For example, an individual who enjoys sky diving will typically pay more than someone who plays golf.
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| Medical history and physical condition |
Your blood pressure and cholesterol levels can affect your rates. If you have a chronic illness or a family history of diabetes, heart disease or cancer, you will likely pay higher premiums.
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| Occupation |
If your job involves risk or travel to dangerous locations, you typically pay more for life insurance.
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To Lower Costs
- Exercise, eat well and
do not smoke.
- Maintain a healthy
weight.
- Purchase life insurance
at a young age to get a lower rate.
- Purchase the appropriate amount of life insurance using a combination of term insurance and permanent insurance to meet short-term and long-term financial needs.
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