Purchasing life insurance takes serious study Individual needs determine what you should buy.

Your money

April 17, 1992|By Frank Garofalo | Frank Garofalo,Knight-Ridder News Service

Buying life insurance can be perplexing.

What type do you buy? How much do you need? How much can you afford? All are questions that can be answered only by taking into account an individual's needs.

While there are many variations, the American Council of Life Insurance says life insurance comes in two basic types: whole life and term.

If you are looking for insurance that can provide financial benefits while you are around to use them, then consider whole life.

Whole life -- also called permanent life -- offers a policyholder permanent protection, a fixed premium, a fixed death benefit and a fixed cash value. Earnings generated by the policy are not taxed while the policy is in force.

The fixed premium feature is very important for some people. It means the insured will pay the same premium at age 65 as at age 30. The early premiums, with interest earned, form the basis for a growing guaranteed cash value.

Policyholders can use the cash value as collateral for a loan. The cash value is what keeps the premium level fixed for the term of the policy.

For an older, more established family, the fixed premium and cash value accumulation of a whole life policy should be more attractive than a term policy, the council says.

But it warns that if you buy whole life insurance, you should intend to keep it for the recommended long-term.

It can be "quite expensive" to allow such a policy to lapse in its early years, since the premiums are generally higher than for term insurance.

Variations of whole life usually provide some flexibility, while affording permanent protection.

In some cases, premium payments can vary; there can also be flexibility in the amount of death benefit payment, the term of protection and cash value growth, for example. Universal life, excess interest whole life, variable life and adjustable life are some of the names given to those policies.

Term insurance is designed to provide policyholders with short-term rather than lifelong protection. It is just what its name implies -- life insurance purchased for a specific period, or term.

Term insurance should provide these features: protection for a specified period; the option of renewing or converting to a whole life insurance policy; a low initial premium; an increase in the premium with each new term; and, typically, no cash value.

In the short-term and in a policyholder's early years, term provides maximum protection at the lowest cost. At the end of the term, or period, the policy expires.

Term insurance is useful if you are young and want to make sure your spouse and children would be taken care of if you were to die unexpectedly.

You should understand that premiums paid for life insurance are higher if you buy a policy when you're 40 than if you bought the same amount of insurance when you're 30, since the probability of death increases with age.

Consequently, term insurance can be very expensive if bought to cover the person's lifetime.

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