Determining how much life insurance you need requires a careful examination of your current and future financial obligations (i.e., a combination of (a) what would it cost to help your surviving
family members meet immediate and ongoing needs like funeral costs, taxes, food, clothing, utilities, mortgage payments, etc. and (b) future obligations like college and retirement funding) and
the resources that your surviving family members could draw upon to meet those obligations (i.e., your spouse's income, savings and investments, other income producing assets, and any life
insurance you might already own).
The difference between the two (your financial obligations minus the resources your family has to meet those obligations) is the approximate amount of additional life insurance you need. If this sounds confusing, don't worry. You're not alone. That's why most people turn to a qualified insurance professional when they want to figure out how much insurance they need. But if you don't feel you're ready to speak with an agent or want a preliminary sense of your needs before meeting with an agent, visit our Life Insurance Needs calculator. It'll walk you through the various questions you need to ask yourself and provide you with a rough estimate of how much insurance you need to protect your family.
It's impossible to say which is better because the kind of coverage that's right for you depends on your unique circumstances and financial goals. But generally speaking, term offers the greatest
coverage for the lowest initial premium and is a great solution for people with temporary needs or a limited budget. Permanent insurance may make more sense if you anticipate a need for lifelong
protection and like the option of accumulating tax-deferred cash values. Also, it doesn’t have to be either one or the other. Oftentimes, a combination of term and permanent insurance is the
right answer. The best way to figure out the amount and type of life insurance that makes sense for your particular situation is to meet with a qualified insurance professional.
There are two main types: Whole Life or Universal Life. Whole life insurance is the most traditional form of "permanent" insurance. With it, the face amount (the death benefit) and the
premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. You also get a guaranteed rate of return on your cash values. Of
course, any guarantee relies on the claims paying ability of the issuing insurance company. By contrast, the cash value in universal life is linked to interest rates, and the cash value of
variable life and variable universal life is linked the performance of the underlying investment options you choose to invest in and fluctuate with market conditions.
The cash value of universal and variable policies is not guaranteed, although some policies set a minimum death benefit. With universal policies (universal life and variable universal life) you can reduce or increase the amount of the death benefit and vary the amount or timing of premium payments, subject to certain limitations. If you're having a hard time understanding the differences between these policies, don't despair. You can learn more about permanent life insurance by clicking here. Or better yet, contact an insurance professional in your community who can take the time to walk you through your various options.
Whether you should consider adding a rider to a policy you're considering really depends on your specific needs, objectives and budget.