Wikipedia describes the reason for having life insurance as “Generally, the purpose of life insurance is to provide peace of mind by assuring that financial loss or hardship will be alleviated in the event of the insured person’s death.”  While this is a good start there are many opinions and thoughts on how much is needed and for how long the life insurance needs to be in place.  While many people believe that life insurance should be purchased to cover the mortgage on their residence if they die prematurely the financial reality is that often the beneficiary will not have the same earnings potential or may have child rearing obligations that being “rent free” does not address.  Most life insurance agents have had the sad experience of delivering a death benefit check.  If the insured planned properly with his or her agent the experience is very different than if they had not.  The rule of thumb is taking ten times earnings plus the mortgage.  This is close to being an amount that will work.  An experienced agent will advise that what the life insurance should do is fully replace the earnings potential of the insured.  This is known as “human life value”.  It is important to note that none of the insurance providers will offer more than human life value under any circumstances.  In this sense the insured will never be worth more dead than alive. 

There are several types of life insurance.  The most well-known are explained beloew

Term Insurance (formerly known as Terminating Insurance)

Term insurance provides inexpensive coverage and is for a fixed period.  Usually, 10-year, 20-year and 30- years.  The longer the term the higher the cost.  Some term insurance can be converted to permanent insurance during the course of the term.  This is not always the case and if you convert late in the policy the cost will be significantly higher.

Whole Life

Whole life is the oldest form of life insurance.  Whole life is generally offered by mutual life insurance companies.  In Whole Life the mutual company shares the risk will all of the policy owners and for this reason underwriting is more involved.  Whole Life comes in a few variations on payment.  One option is Whole Life with continuous payment for the insured’s life time (15-75) .  Other variations are policies that are guaranteed that no further premiums are due based on age or number of years.  Whole Life builds cash value and dividends are paid by the insurance company.

Universal Life

Universal life is essentially a term policy (as described above) that the insured will pay for his or her entire life.  While it is more expensive than term it does allow the insured to change premium frequency and premium amount.  While this is a nice feature it may cause problems later in the policy and require larger and more frequent premiums to be paid to maintain coverage.  It is important to note that the cost of insurance increases every year.  If this kind of policy is selected it is a very good idea to read the fine print.  Within the Universal Life family there are two types.  One is Variable Universal life which is tied to the stock market.  If the market is good these policies will function well.  Since the policy requires a good market they normally do not have a guaranteed death benefit but some do.  There is another variation called Indexed Universal life.  While not directly invested in the stock market it is tied to an stock index or multiple stock indexes.  These are complicated financial policies and you should review carefully the terms and conditions before you sign a contract.

Please note: Your employer may offer you Life Insurance coverage.