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Just the facts on life insurance

Most kinds of insurance cover you for something that might or might not happen. With life insurance, you're insured against something that is certain to happen -- your death.

Death is not a pleasant event to ponder. Maybe that's why life insurance seems to be surrounded by euphemism and unexamined rules of thumb. For instance, it's called life insurance, but it's really death insurance. Can you imagine trying to sell "death insurance?" Life insurance salespeople have a tough job as it is.

As far as unexamined rules of thumb, the most popular is the one that says your guaranteed life-insurance benefit should equal four times your annual income. Or is it five times? Or 10 times? It's not a useful guideline if you can't remember it and people disagree on the number.

Who needs it?
The first question to ask about life insurance is whether you need it. People with dependents are the most likely customers for life insurance -- that is, people with school-age children, nonworking spouses or parents who can't take care of themselves. A favorite charity could be a dependent.

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People without dependent children, those who have accumulated enough wealth for a surviving spouse to live on, and single people might not need life insurance

Term insurance
After deciding whether to get life insurance, the next question is what kind.

The most basic type, and the easiest to understand, is term insurance.

For a specific period -- it could be one or two years or 10 or more -- you pay a fixed premium annually. If you die during that period, the beneficiary collects a previously agreed-upon amount. If you don't die during the term, elves in the insurance company's headquarters chuckle maniacally as they play in a wading pool filled with the money you sent in all those years.

OK, OK, so there are no elves or wading pools filled with currency. With term insurance, if you're still alive after the term ends, your coverage vanishes and you have nothing to show for your money except the peace of mind you had knowing that your loved ones would be taken care off in the event of your demise.

If you're not rich, term insurance tends to be the best deal because you get the most coverage for the least amount of premium. Term coverage allows you to separate the money you spend for life insurance from the money you spend for retirement savings and investments. You can take out a term policy for as long as you need it -- for example, until your youngest child graduates from college -- and then terminate the coverage.

Permament insurance: Whole, universal, variable
People who are wealthy enough to need to do estate planning, or who want to be forced to save and invest because they don't have self discipline, often get permanent life insurance. There are three basic types: whole life, universal life and variable life.

Whole life is like term insurance in that you have set premiums for a set benefit, but the policy doesn't have an ending date. You pay the premium for the rest of your life unless you cash in and receive the cash value as a lump sum. The cash value is different from the face amount.

With universal life, the insurer separates the death benefit from the investment portion of the premiums. The investments pay for the death benefit. No matter how well or poorly your investments do, you are guaranteed a minimum death benefit.

With variable life, the amount of the death benefit varies with how well the investment portion of the policy does.

Permanent life policies can be complex. Don't buy such a policy if you don't understand it. If the seller explains it to your satisfaction and it meets your needs, then by all means get permanent life insurance.

The next question is how much insurance to buy. That's a toughie. The aforementioned rules of thumb dictate that you buy coverage equal to some multiple of your annual income. The experts say it's much more complicated than that. You have to look at your survivors' financial needs and their potential earnings vs. your savings and investments, potential Social Security benefits, and your job's insurance payout, if any. Your life insurance fills the gap.

Health and disability insurance

Somewhat related to life insurance (because it relates to your body) are health and disability insurance.

A story that describes how married couples can maximize their health insurance benefits advises you to compare insurance plans from head to toe if both spouses have jobs that provide health benefits. It's not always a matter of dollars and cents. Sometimes you might be willing to pay more to come under your spouse's coverage because you prefer the doctors who are available under the plan. also has looked at health insurance options for the unemployed. If you want a lucid explanation of COBRA, check out the story.

One story supplies 12 questions to ask about long-term care insurance. Among the questions: Why buy it? What happens if I get sick and I don't have this type of coverage? At what age should I buy it? How much does it cost?

A story about long-term disability insurance points out that this type of health coverage protects your ability to earn an income. It notes that your chance of being disabled at age 40 is much higher than your chance of dying.

-- Posted: Sept. 23, 2003

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