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Money Lesson 20 - Life Insurance [Page 1] |
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The two main categories of life insurance are term and permanent life insurance. Term Life Insurance Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years. You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years. Permanent Life Insurance Permanent life insurance is different from term life insurance. For one, permanent life insurance provides coverage until you, the policyholder, die. You may cancel, or surrender, a permanent life policy but will likely have to pay a surrender charge. Surrender charges are like paying a back-end load when you sell shares of a mutual fund—it lowers the investment performance of the policy. A second major distinction of permanent life insurance is that your policy builds up a cash value. Cash value is also called cash surrender value (CSV). This buildup in cash value occurs because you invest a part of your permanent life premiums. How these premiums are invested is what determines what type of permanent life insurance you have. The most common types are whole life, universal life, and variable life insurance. Your cash value is the amount you are entitled to if you cancel your policy. With some types of permanent life insurance, you can use the cash value in your policy to adjust either your death benefit or premiums. Alternatively, if the cash value of your policy declines, your death benefit may also decline. Cash value is a personal asset. You should include this asset when you prepare a statement of your personal net worth. When you apply for a loan, for example, you should disclose the cash value of an insurance policy as a personal asset. You can also use the cash value of an insurance policy as collateral for a loan request. Insurance is sold, not bought Insurance agents are a unique breed, one that is evolving but hardly approaching extinction. Due to insurance is about protection for future, many people not seeing an urgency to buy it; hence, most insurance policies are sold by insurance agents through pursuasion and explaination to their prospects about the needs of a life insurance coverage. Whole life is not cheap Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often can't afford an adequate face value, leaving themselves underinsured. A better way is keep your investing and insurance strictly separate. Whole life policies are built on assumptions The returns quoted by the agent come in two forms, guaranteed and non-guaranteed. The guaranteed return is fixed interest added to the policy's cash value, but the non-guaranteed are simply guesses based on projected investment returns -- not reality. And some companies keep these guesses of future returns on the high side to attract more buyers. Buy when you're healthy Older people and those not in the best of health pay steeply higher rates for life insurance. So buy as early as you can, but don't buy until you have dependents. Tell the truth When a large claim is made, the insurance company will investigate before paying. Hence, to ensure that you don't face any problem when making an insurance claim, you need to disclose all your facts expecially if you have health issue, including the past record. Next : Type Of Life Insurance |
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