What is life insurance?

When a person dies, there are many expenses that will need to be paid. These expenses may include such items as funeral costs, burial expense, current bills, and estate taxes. In addition, there may be financial needs the insured would have met if they had remained alive, including family living expenses, mortgage payments, long-term debt, and college costs for children. The Primary Function of a Life Insurance Policy is to provide, upon death of the insured, an amount sufficient to pay for any or all of the preceding costs and expenses. Which expenses or costs are to be provided for, and how much money will be needed is entirely up to the insured.

How much life insurance should I have?

There are many and varied needs for funds upon the death of an individual, and all must be taken into account to arrive at a proper amount of insurance. For simplicity, some authorities recommend a good rule of thumb to be five times your annual income. Your Alliance Insurance agent can talk with you about your needs and goals, and illustrate how each item translates into a given amount of funds needed at the time of death. He or she can also share how to account other sources of income (such as Social Security or retirement plans) that will actually lower the amount of life insurance necessary.

Who will receive money if I die? How much?

Upon death of the insured, the insurance company pays the policy's benefit amount to the beneficiary (or beneficiaries) named by the insured on the policy. Some policies may provide additional benefits, so be sure to discuss this with your Alliance Insurance agent.

Are there different types of life insurance I should consider?

Although there are many types of life insurance policies, nearly all are variations of two basic types, term and permanent. (A third type, known as universal life, is a combination of term, permanent and various investment options. Its complexity is beyond the scope of our overview, but if you are interested, your Alliance Insurance agent can discuss if universal is a good fit for your life insurance needs and goals.)

• Term insurance is exclusively death coverage. The policies are written for a specific length of time (the term referred to in the name). Common terms are one year, five year and ten year, although longer terms may be available. If the insured dies during the term of the policy, the death benefit is paid to the beneficiaries. If at the end of the term the insured is still alive, the coverage ends.
  
• Unlike term insurance, a permanentinsurance policy (often referred to as whole life) never terminates as long as the premiums are paid. It also builds cash values in the policy that can provide valuable living benefits in addition to the death benefit.

Which life insurance is less expensive, permanent or term?

Since term insurance only provides a benefit if the insured dies during the policy term, its premiums will be the closest to pure death cost. This is why term is the least expensive coverage to buy at younger ages. At older ages, however, the cost of a term policy rises rapidly along with the increasing death cost, and may soon become prohibitive for many senior citizens. A term insurance policy's premium will remain the same during the term, and then increase at each renewal. For example, an annual renewable term policy is written for one year at a time, so the premium will generally increase each year. A five-year renewable term policy's premium will remain level for the five-year term, and then increase at the renewal. Once renewed, the policy premium remains level until the next renewal, and so on until the renewal provision expires (typically at age 65), or when the insured either decides the premium has risen too high or the insurance is no longer wanted.

Permanent insurance rates are also fixed for the policy term. However, since the policy is permanent, this fixed premium must represent an average death cost over the entire expected life of the insured. The result is that permanent policy rates will often be significantly higher than term rates at the younger ages, but then significantly lower at older ages.

MSN's take on Term or permanent life insurance?