Written by Sean Pollock

Monday, 16 June 2008 21:58

So you know you need life insurance. You called your local agent and made an appointment thinking you would go in, fill out an application, get a medical exam and all would be done. But as you sit there listening to phrases such as "term", "whole life", "universal", and "universal variable" you realize there is much more to insurance than you ever thought - and more than you wish you needed to know. The variety of insurance products serve a variety of needs, but once those needs are established, one question often remains: how long will you need life insurance?

Simply put, you need life insurance for as long as you need to be protected. If you had all the wealth in the world you wouldn't need insurance. You would then leave your wealth to your family and that's the end of story. The reason you are buying life insurance is that your savings are not enough to allow your family be financially independent without you. Life insurance solves that problem by paying off your debt and replacing your income for your family in case you die.

The main difference in policies is their insurance term and benefits. You can generally buy insurance coverage over a certain period of time (term life) or over an indefinite period, extending up to your death (permanent life).

Term Life is good for a specific period of time, ranging from 5 to 30 years, depending on what term you select. It doesn't grow and doesn't maintain any value after the term. So for example, a person could get a Term Life plan for 10 years to pay $800,000 upon death within those ten years. If he died the day after, no benefits are paid.

Unlike that the permanent policy provides coverage over entire life and offers two main benefits: a death benefit similar to term insurance, and a savings portion also called 'cash value'. With permanent life you will always be able to get back part of the premium you have paid over time. Depending on the type of permanent insurance, you can even have the cash value grow over time if placed in an investment vehicle such as mutual funds in a variable life plan.

Because permanent life covers more risk and guarantees a benefit at some point in the future it is more expensive than term life. And being generally extended over a longer period it requires more commitment from you. Term insurance premium can be renewed or extended but premiums will always increase when you do so, while the permanent insurance premium will always remain the same.

So if you are on the path to building financial independence you must already have a financial plan, and you must know when your family is scheduled to be financially independent. We always recommend buying term insurance coverage right up until that moment. If you expect to achieve financial independence in 5 years, then protect your income with a 5-year term life, if it's 20 years, go for a 20-year term. Term insurance is cheaper, requires less commitment, and gives you more control of your money. With term life your premium will be completely spent away, but you spend it to buy time until financial independence. And after youve achieved it, there is no point in paying any company for a commitment you are prepared to make yourself.