Life Insurance: What You Need to Know

Find out which life insurance policy is best for your family and how much coverage you’ll need.

Before buying life insurance, parents should know and consider a number of things. There are basically two types of life insurance policies available: term insurance and cash-value insurance.

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Term Insurance
You pay a premium over a set period (e.g., 10, 20 or 30 years). With some policies (“increasing term”), the premium goes up over the term of the policy; with others (“level term”), the premium remains the same. In return, if you die before the term of the policy is up, the insurer will pay your beneficiaries a set sum of money (the “face value” of the policy). When the term of the policy ends, your payments and coverage end.

Cash-Value Insurance
Combines insurance coverage with a savings or investment element. You pay regular premiums on the policy and, if you die while the policy is in effect, the insurer will pay your beneficiaries a set sum of money. Unlike term insurance, however, cash-value policies remain in effect for most or all of your life and, in some cases, you can stop paying premiums on the policy after a period of years.

Generally, there are three types of cash-value policies: Whole life, universal life and variable life. Premiums generally remain the same over the term of the policy. A portion of the premium pays for your insurance, while a portion is put into a “savings account” (the “cash value” of the policy). The only way to access this cash value is to borrow against it or cancel the policy. Policies that include a savings or investment component are generally not a good purchase because such a large portion of the premium is deducted to pay fees, so a relatively small portion ends up going toward savings or investment.

Most people can afford the amount of insurance they need only by purchasing a term policy since the premiums on cash-value policies are so high. In nearly all cases, you’re better off buying the less expensive term policy, and then taking the savings on the premiums and investing those elsewhere.

When buying a term life policy:

  • Purchase a level term policy, so that your premiums will remain constant.

  • Buy a policy that is for a minimum of 20 (preferably 30) years, so that by the time the policy term ends, those who have been financially dependent on you no longer are.

To determine how much insurance you’ll need, or whether you need to increase the amount of coverage you already own, have a needs analysis done by a life insurance broker or use our online Insurance Needs Calculator.

This needs analysis examines what your beneficiaries’ income needs are, then calculates how much life insurance you would need to generate that amount of income (after taking into account income that would be generated by other assets and savings that you’d leave behind).

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