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Life Insurance: Types, Cost Determination, & Coverage Needs

Thinking about buying life insurance, but overwhelmed by all the information and options? Much like the insurance you have for your home or automobile, life insurance is a contract one has with an insurance company. You make the premium payments to ensure that if anything happens to you, a beneficiary of your choice will receive a lump-sum upon your passing.

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Having said that, ensuring you choose the right coverage and policy term can be challenging, and is something that takes careful thought and review.


There are a wide variety of life insurance options to choose from, as the needs and goals of each policy holder are so diverse and unique. Some common types include:

Term: This type of insurance was designed as a way to offer financial protection to a policy holder for a specific amount of time (e.g. 10 or 20 years). With this type of insurance, the premium payments remain the same for the entire time period in the policy, and are generally less expensive than other types of life insurance (i.e. permanent life insurance options). After the period around this policy comes to an end, coverage can still be offered, but at a higher payment rate. Term life insurance policy payouts are aimed to help with potentially lost income during a family’s working years. They offer a safety net for those that are left behind to ensure that the financial goals of a spouse and dependents are still met (i.e. paying off a mortgage, college fees)

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Whole: A type of permanent life insurance, it offers a payout that will provide coverage for your beneficiaries’ lifetime. As such, these policies tend to have increased premium payments, versus the term life insurance. Payments are fixed; however, they also offer a cash value, which can also be utilized as savings, and can accumulate tax-deferred across time. A whole life insurance policy could be utilized as an estate planning tool, and aims to help maintain the financial legacy you have built, so it can be transferred on to beneficiaries.

Universal: This too is a permanent life insurance policy; however, unlike whole life, universal life policies offer flexibility around lowering or raising premium payments, as well as coverage amounts, over time.


Cost determination

How do you determine your premium payments? Insurance companies use risk-related or rate classes to determine this, which entails some factors that include overall health, lifestyle (e.g. if you are a smoker), and family medical history.

Coverage Needs

This can be the most daunting part of choosing life insurance. What are your coverage needs? Should you go with permanent or term coverage? What life events could impact your life insurance policy? What amount do you need in order to ensure your loved ones are protected financially, should something happen to you? Below is some help in determining all this.


Term Versus Permanent

This may be a difficult choice to make; however, you really need to look at where you are in life when opening your life insurance policy, and the needs of your beneficiaries, to make this decision.

If you are choosing life insurance for a specific time period, such as your working years, then term would be good; if you want a plan to span your lifetime, then going with permanent insurance is ideal. Think about not only the coverage period, but the needs of the people that your policy will be paying out to; ensuring your loved ones will be well supported once you are gone.


Coverage Amount

The amount of coverage is also a vital thing to think about when obtaining life insurance, as this is the dollar figure that will be given to your beneficiaries once you are gone. This number depends on their financial needs, and family financial goals, so there are some things to think about when determining the amount:

  • Your assets
  • Your liabilities (debts)
  • Added life insurance (through work)
  • Additional costs that the family could face in your absence (i.e. mortgage, college, funeral costs, cost of living, etc.)
  • Your potential income

Once you’ve decided on a coverage period and amount, many financial experts will agree that you need to ensure to review your life insurance policy routinely, over time. Not only can life milestones cause a change in direction when it comes to your life insurance, other factors (i.e. divorce, a change in jobs, inheritance, etc.) can alter your financial needs and goals, thus creating a potential need to change your life insurance policy as well.


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