Family Life Insurance Choices

As a general rule, many insurance professionals recommend that people carry life insurance with a face value equal to at least seven times of their income. However individuals with growing families may need as much as 20 times their own income to adequately protect against the unexpected. Why the discrepancy? Simply put, if a large portion of income is lost due to a parent's death, the surviving parent will find it very difficult to support dependents on a single income whereas this is not a consideration in families without minor children.

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Term Life

Traditional term life insurance policies are issued for a set face value for a certain period of time varying from one year to as long as 30 years. While these policies are the most inexpensive of life insurance products and therefore the best for families with limited incomes, they are truly a no-frills policy type. There is no cash value associated with a term policy. If it lapses, it's simply gone.

While level premiums are guaranteed throughout the policy's stated term, after that keeping the policy becomes increasingly expensive, if not impossible. After the term ends, the policy can be renewed year to year based on the age of the insured at that time (as opposed to the age when the policy was issued). This is demonstrated in the illustration that is provided to the insured during the sales process. As the insured ages, the cost becomes prohibitive. As a result these policies are seldom renewed after the term ends.

That said, term insurance does have its advantages. Given its inherently temporary nature, it is a good fit for temporary life insurance situations. Just because a growing family is recommended to have 20 times its income in life insurance now doesn't mean that such a situation will still be the case 15 years from now.

Whole Life

Well over 90 percent of term policies lapse in one way or another before the insured's death, therefore very few death benefits on term policies are actually paid out. Because whole life policies are designed to remain in force throughout the insured's life, they are the most likely life insurance product to actually pay a death benefit. Given this and the cash value a whole life policy accrues, there are clear advantages to it. If one can afford to maintain the premiums of a whole life policy, it is clearly the way to go.

Whole life policies aren't always expensive, though. Policies on infants and small children can be purchased at very reasonable rates. With underwriting issues are exceptionally rare, these policies issue in a snap. It also provides permanent insurance for the child, which they will no doubt appreciate as adults.

Even if at some point in the future these premiums become too much of a budget-buster, one can simply take a non-forfeiture option called reduced paid-up insurance. This means that the face value of the policy is reduced, but that policy premiums are paid in full and the policy is in force for life with no further payments required. This option can be exercised on whole life polices for children and adults alike.

Particularly well-off families may want to consider a single premium whole life policy to meet their family life insurance needs. While the premium for these policies is quite substantial – especially if the proposed insured has health issues – they have one obvious and very attractive advantage: pay it once and it's in force for life.

Universal Life

Popularized in the 1970s, universal life insurance (UL) and its close cousin variable universal life insurance (VUL) are insurance products that combine the beneficial aspects of a term policy's lower premium with a whole policy's cash value. The most noteworthy aspect of universal life products are their variable premiums. The philosophy behind universal life is to keep enough money in the policy to allow the interest the cash value generates to keep it going. As a result premiums can be adjusted to correspond with a family's changing budget needs.

UL and VUL policies work in much the same way with one very important distinction. The cash value on a UL policy is dictated on a fixed interest basis, while the VUL is funded in a similar manner to mutual funds, which in turn increases the possibility for increased cash value as well for possible cash value loss. Accordingly insurance professionals are required to hold securities licenses in addition to insurance licenses to sell VUL policies.

The down side to universal life is that paying both too little and too much into the policy both have adverse consequences. If one pays too little into a universal life policy, the cost of insurance eventually eats away at the cash value and the policy lapses. If one pays too much, the risk is turning the policy into a modified endowment contract, or MEC. If a universal life policy becomes a MEC, many of the tax advantages associated with life insurance are lost. Both of these scenarios can be avoided by funding the policy with a single premium or by paying level premiums high enough to keep the policy in force but low enough to prevent it from becoming a MEC. Even so, with either option the advantage of flexibility is lost.

Universal life products may be a good fit for some family life insurance strategies, but in order to get the most of them they require more attention than other life insurance products. This is particularly true of the VUL.

Return of Premium

A newer, middle of the road option which may be ideal for a family life insurance plan is a term life insurance policy with a return of premium (ROP) rider. The philosophy behind ROP is quite simple: if the policyholder dies while the policy in force, the beneficiary receives the face value of the policy just as in a traditional term policy scenario. However if the policyholder survives to the end of the term, he or she gets back all premiums paid over the course of the policy.

Also, unlike universal life insurance products, the premiums are level throughout the policy's life. Although ROP premiums are paid back dollar for dollar with no interest, they nonetheless represent a large, contractually guaranteed lump sum payment at the end of the term. The ROP rider can be very appealing to a parent of a small child. Say a parent of a three-year-old buys a 15-year term policy with ROP. If the parent dies, the child is provided for. If the parent lives, a sizable check is mailed just in time for that child to attend college.

ROP premiums are more than traditional term policies, but less than most than whole life or universal products. While ROP policies became quite popular with insurance companies in the middle part of the last decade, many have since stopped offering the product. If this is an option one is interested in it may take a little bit of research to find it, but it is still out there.

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