Figure out if you need life insurance and which type is best.
Money Girl
228 MG 7 Tips to Choose the Right Life Insurance
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I'm Laura Adams. When it comes to buying life insurance, there are many different products to choose from, like term, whole, universal, and variable. What the heck is the difference between them and which type is best anyway? Keep listening and I'll explain the differences in plain English and give you seven tips to figure out which type of life insurance is right for you. Life insurance is a contract between you and an insurance company in which they promise to pay out some amount of money if you die. Ask yourself this question, "Is there anyone who depends on my income, who will be in financial trouble if I die?" If you answer yes, then you need life insurance. I know it's not a pleasant topic to think about, but it's important if you have children, a stay-at-home spouse, or other family that you take care of. Before you start shopping for a life insurance policy, you need to understand all your options. The two main types of life insurance are called temporary and permanent, which one is best is a hotly debated topic in personal finance, so I'm going to cover the main points of each. Term or temporary life insurance provides protection for a specified period of time only, like a term of 10, 20, or 30 years. Term is the most affordable coverage because it doesn't have any fancy features. All it offers is a pure death benefit. The price or premium typically stays the same each year during the term. The downside to term insurance is that once it expires, the price to buy a new policy goes up as you get older. Permanent life insurance, on the other hand, provides a death benefit for your entire life, and it's also an investment. A portion of each premium you pay goes into an account known as the policy's cash value, and it grows on a tax-deferred basis until you take a withdrawal or borrow from the policy. The downside to permanent insurance is that it's expensive and comes with fees and commissions that usually reduce your annual return on the investment part of the policy when compared to what you could earn in the market otherwise. The three most common types of permanent life insurance are whole life, universal life, and variable life. A whole life policy gives you a guaranteed death benefit, a fixed annual premium, and a guaranteed rate of return on your cash value. Since those guarantees are locked in and can't fluctuate, whole life is the most expensive life insurance product available. The second type of permanent policy is universal life, and it does not offer the guarantees of a whole life policy, but it has more flexibility. The premiums are less expensive, but they can also increase up to a maximum amount. With universal life, you get a minimum rate of return on your cash value, but it can grow more quickly because you have the ability to earn more when the financial markets go up. And the third common type of permanent life insurance is variable life. It's similar to universal except that you choose how to invest your money from a menu of securities and funds. It offers the most flexibility and risk of all the permanent policies. There's no guaranteed minimum rate of return if the investments you pick perform well your cash value could skyrocket. But if not, your cash value could plummet. AT&T customers switching to T-Mobile has never been easier. We'll pay off your existing phone and give you a new one free all on America's largest 5G network. Visit t-mobile.com/carrierfreedom to switch today. Pay off up to $650 via virtual prepaid master card in 15 days. 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If your budget only allows a few hundred dollars a year for insurance, then a term policy will fit the bill. It's better to have an affordable short-term policy rather than no insurance at all. Permanent policies can be up to 10 times more expensive than term policies. Tip number two, calculate the benefit needed. Most people simply want to get the most payout that they can afford to ensure that if they die, their family will be left in good financial shape. If that's your goal, a term policy is probably best. A good rule of thumb for calculating the minimum amount of life insurance you need is to multiply the annual income you need to replace by five. Also, check out the life insurance calculators at lifehappens.org and bankrate.com. Tip number three, evaluate how long you need insurance. The longer you intend to keep a life insurance policy, the more a permanent policy can pay off. That's because the cash value could grow large enough to compensate for the high premiums if you own it for at least 10 years and the market is doing well. Tip number four, be clear why you need insurance. Some people may not need life insurance after their kids are grown or once they retire, which tips the scales toward a term policy. However, if you need a policy to pay a beneficiary, no matter when you die, perhaps to support a disabled child or to help your heirs, then a permanent policy is the way to go. You may want to consider having both a term and a permanent policy to address specific financial needs. Tip number five, assess your health. When you're young and in good health, a term policy is cheap, but if your health is declining, a permanent policy may be the most affordable way to make sure that you can have life insurance for as long as you need it. Tip number six, remember the purpose. The purpose of life insurance is to protect a beneficiary against a financial loss, not to turn a profit. If you have money to invest, a life insurance policy is not the most effective investing tool. You may have heard the saying, buy term and invest the rest. However, if you're a poor saver, a permanent policy can be a forced savings plan that will boost your wealth if you own it long enough. Tip number seven, use highly rated insurance companies. A life insurance policy is only as good as the company that stands behind it. You can check out insurer ratings and get free quotes at sites like acuquote, insure.com and matrix direct. Life insurance is not a simple product, which means you need to do your homework and speak to professional agents before you buy it. Depending on your situation and financial goals, a permanent policy can be a smart planning tool or an expensive hazard to avoid. On the money girl page at quickanddirtytips.com, you'll find the notes for this show number 228 and all kinds of good stuff. Like how to connect with me on Facebook, Twitter and LinkedIn. You can email me your money question, sign up for the free money girl newsletter, subscribe to the podcast and search for financial topics in hundreds of my podcast and blog posts. Most people get the show through iTunes. So if you're not already subscribed to the podcast there, it's free, easy and the most convenient way to get each new weekly episode. If you like these tips, you'll love my award-winning new book Money Girl Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don't. We're even giving away two free chapters from the book for you to sample at smartmoves2growrich.com. I'm glad you're listening. Cha-ching. That's all for now. Courtesy of Money Girl. Your guide to a richer life. 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