Financial Literacy 2007 - Insurance
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Questions to ask about life insurance

Ask yourself these questions when considering life insurance:

The calculation
How much life insurance do you need? ______________________

  • Determine a sum of money that your dependents would need annually in the event of your untimely death.
  • Once the annual amount is tallied, calculate how much principal it would take, invested conservatively, to generate interest earnings equal to that annual sum. Assume you don't touch the principal, and estimate earnings of 5 percent to 6 percent per year. That's one way to come up with how much life insurance to buy.
  • An alternative is to get a death benefit equal to three times your annual salary. Your beneficiaries will have money to last for a few years -- long enough to get their bearings and come up with ways to generate income on their own.

Term or whole life
What kind of life insurance do you want? ______________________

Do you only need insurance for a specific period of your life? ______________________

  • Most parents stop carrying life insurance after their children are out of college or on their own. Think term life in this case; you'll get the most bang for your buck and if you outlive it, it just goes away.

Do you have exigent circumstances which require more long-term financial care? ______________________

  • For instance, a special-needs child that would need financial security after you die. In this case, whole life would be the route to take.

Do you have a business or a large estate? ______________________

  • If so, you should consult an estate-planning attorney or business succession expert to help you determine what type of policy best meets your needs.

Types of policies
Which whole life plan would be appropriate for you? ______________________

How much risk are you willing to assume with cash value and death benefit of your policy? ______________________

  • In a whole life policy, there is a guaranteed death benefit and often a low guaranteed rate of return on the cash value of your policy.
  • With universal whole life policies, the policyholder pays the premiums and the insurance company invests a portion in bonds or mortgages.
  • With universal variable you choose the investment vehicle.
  • With a variable whole life policy, there are even more investment options than with universal variable -- and also more risk.

Life insurance policies are difficult to compare on an apples-to-apples basis because insurance companies tend to offer different features in their plans. Also, many factors beyond the consumer's control -- such as a company's return on investment, its cost of doing business and the actuarial assumptions used for its mortality rates -- affect prices of policies. An unbiased fee-based financial planner who does not get commissions for life insurance products may be in the best position to help you find a policy that fits your needs.

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