Grover and Bertha Smith are the proud parents of twins, Able and Gable. It
takes their combined income of $60,000 a year to provide a decent life for
their family. Both are 32 years old and they have started to worry about what
would happen if one of them were to die. They have a mortgage and are paying
off loans on two cars. Without both incomes, they are afraid they would lose
the house if something were to happen to one of them. They have begun to look
into life insurance.
What is whole life or permanent insurance?
Whole life is a life insurance policy that combines life insurance with
savings. The premiums are invested by the insurance company and some of the
earnings are passed on to the insured. It extends coverage to a person until
she is 100 years old.
What is term life insurance?
Term life insurance is a policy that provides coverage for a set term and
does not accumulate a cash surrender value or pay out dividends. The policy
provides a stated benefit, the amount to be paid out if the insured dies. When
the policy expires, it is up to the policy owner to renew it or let it expire.
Some policies are annual renewable term or ART. After the premium is paid for
one year, the policy is guaranteed to be continued. The period typically runs
for 10 to 20 years and sometimes covers people up to age 95. The most common
type of term insurance is called level term. The premium is the same for a
given number of years: 10, 15, 20, 30. The longer the term, the higher the
premium because the chance of death increases as the insured ages.
What are conversion privileges?
Many policies offer conversion privileges for a certain period of years.
This allows the person to convert to a permanent policy regardless of health
conditions. A young person might be able to afford only term insurance but as
she makes more money, she can convert to the higher priced permanent insurance.
What does term life insurance cost?
Bertha Smith would pay about $13.00 a month for $250,000 worth of insurance,
Grover would pay a bit more. Permanent life insurance is 8 to 10 times more.
What is the advantage of term life insurance?
The advantage is that it is considerably cheaper than permanent life
insurance. Many financial advisors feel that by investing the difference in
cost between term and whole life insurance, the consumer comes out way ahead.