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5. What Type of Life Insurance?

Finally, you must determine the type of insurance that you need. There are two main types of life insurance: term insurance, or insurance for a specific period, and permanent insurance (also known as endowment or cash value insurance), which is term insurance with a savings component. The type of insurance you choose will depend on four factors: priorities and preferences, amount of insurance needed, ability and willingness to pay premiums, and duration of need.

Your “priorities and preferences” refers to your goals and objectives. What do you want this life insurance product to do? What are your personal goals? Your preferences are what you generally like to do. Do you prefer to “own” or “rent”? What are your “biases” for insurance? Are you willing to take the risk of re-insurability?

The amount of insurance needed refers to how much insurance you need. Buy term insurance when there is no way to satisfy the death need without it. The term protection can be converted to another form of protection at a later date, if appropriate (i.e., convertible term). Buy a combination of term and permanent when you can cover the entire death need and are able and willing to allocate additional dollars to appropriate permanent coverage.

The ability and willingness to pay premiums refers to your willingness to make payments. Pay on installment basis (term or low outlay whole life) if your mortality risk is higher than average. Prepay coverage if you expect to live longer than average (vanishing premium or limited payment whole life) or you want payments to stop at a specific age. Purchase a yearly renewable term if you want minimal payments initially that increase year to year. Consider permanent coverage if your cash flows are sufficient to cover the higher premiums and you are you committed to paying for it.

The duration of need is your final consideration. Buy a term policy if your need is less than ten years. Buy a term or consider a permanent policy if the need is for ten to fifteen years. Buy a permanent policy if the need will last longer than fifteen years or buy a guaranteed renewable term policy with your required duration, such as ten, twenty or even thirty years. Finally, buy a permanent policy if the coverage will be continued beyond age fifty-five or if the policy will be used for estate taxes and charitable giving.


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