Why Do I Need Life Insurance? What Kind Do I Need?

The most important reason to buy life insurance is different depending on your specific needs. Some reasons are to have enough money to provide for dependents such as young children, non-working spouses or elderly parents, should you have a heart attack, cancer, stroke (or similar health issue) and live and need money or you die and be no longer able to provide for them.

Many financial experts also consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

- To replace income for dependents: If family members depend on your income, life insurance can replace that income for them if you die.

- Pay funeral expenses: Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.

- Pay federal "death" taxes and state "death" taxes: Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance.

- Create a source of savings: Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner's request. Since most people make paying their life insurance premiums a high priority, buying a cash-value type policy can create a kind of "forced" savings plan. Some Life Insurance plans like an IUL that’s properly structured can also give you tax-free income! I’ll go over that in a few minutes…keep reading!

There are two major types of life insurance - term and whole life.


Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually 10,15, 20, 25 or 30 years. However, some policies have “Living Benefits” which can allow you to use a portion of the death benefit while you are alive if you have a terminal, chronic or critical illness.

You should consider if:

1. You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specific time period, buy a term policy for that period.

2. You need a large amount of life insurance but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings.

3. You are over 60 and have no Long-Term Care (LTC) policy. I’m not saying this is a replacement for a LTC policy, but having a term policy with living benefits at least provides the living benefits in case you have a health issue. 1 in 2 Americans will need care in their elderly years.

Whole Life / Permanent / IUL

Whole life or permanent insurance pays a death benefit whenever you die - even if you live to 100! There are three major types of whole life or permanent life insurance - traditional whole life, universal life, and indexed universal life, and there are variations within each type.

You should consider if:

1. You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.

2. You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can't pay them otherwise, or it can be used for any other purpose you choose.

3. Indexed Universal Life (IUL) - these are permanent policies that have a life insurance element, but properly structured can provide multiple benefits like accessing (your) money without IRS penalties prior to ages 59 ½ and at 70 ½, living benefits, guaranteed no loss of principle, tax deferred accumulation and tax free distributions which are typically for retirement years. These policies are an excellent addition to a properly designed retirement plan.

How do I qualify?

It depends on the policy you wish to buy. Some policies simply require the satisfactory answer to a series of medical questions that will be compared to your medical records. They will check your Medical Information Bureau (MIB), do a prescription check and check your motor vehicle record. With other policies, a full medical examination will be required. In that case, the medical exam helps pinpoint certain aspects of your health situation to determine your exact rate class. Obviously, smokers will pay more for a policy.

By getting a clear picture of your health from your life insurance medical exam, the company can place you in the most accurate rate class, which determines what you pay. This can mean lower whole life or term insurance rates. Typically, a simple blood test and urine sample are used to measure cholesterol levels and screen for problems such as diabetes, liver or kidney disorders.

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