Buying Life Insurance


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When you buy a life insurance policy, you pay a premium to the life insurer on a periodic basis to maintain your policy. A life insurance policy pays a death benefit to the policy's beneficiary.

Life insurance policies are structured in many ways. A policy can have more than one beneficiary. A death benefit can be paid as either a lump sum or annuity. Some types of life insurance build up a cash value, which is considered an asset of the policyholder.

To calculate your premium, the life insurance company compares your life expectancy to persons in the same segment of the population. This process of calculating premiums is called underwriting. To help underwrite your policy, a life insurer requires you to complete a health condition questionnaire and usually requires you to take a physical exam.

If the questionnaire determines that you are a 50-year old male and non-smoker, you will likely pay a premium that equals how much other 50-year-old, non-smoking males pay. Naturally, the higher your risk, the larger your premium will be.

The two main types of life insurance are permanent life and term life insurance. Permanent life insurance provides coverage for the rest of your life, while term life insurance covers you for a fixed period of time. Most term life insurance policies are sold for 10- or 20-year terms.

Permanent life insurance includes variable life, universal life, whole life and variable universal life insurance.

Premiums that you pay for permanent life insurance accumulate a cash value. Cash value can be used as a source of borrowing. Cash value is also considered as a personal asset when you estimate your personal net worth.

If you have a variable or variable universal policy, you can invest the cash value in an account that is managed by the insurance company. Term life insurance policies do not build up cash value. As a result, your policy coverage expires if you stop paying premiums.

Your life insurance premiums can be either fixed ("level premiums") or variable ("flexible premiums"). With whole or variable life, your premium is fixed. With universal life or variable universal life, your premium can be flexible. Flexible premiums allow you to modify the policy's cash value and death benefit as needed.

Term life insurance policies usually charge a level premium for each covered term. However, when you renew your policy, you should expect to pay a higher premium. Most term life insurance policies allow you to buy an option to convert the policy to permanent life insurance.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

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