How Life Insurance Works
When you buy life insurance, you pay premiums to an insurance company. In return, it agrees to pay a fixed death benefit to your spouse, children or other beneficiary you choose. The company can provide this protection at an affordable cost because it insures large numbers of people, so its financial risk is spread among many policies.
All Policies Aren’t the Same Once you decide you want life insurance, you’ll need to determine which type of insurance is right for you. There are two broad categories – term and permanent. Term life coverage lasts for a set period of years. Permanent life can last as long as you live. See the chart below for a comparison of the relative benefits of these two types of life insurance.
Compare Term Life Insurance vs. Permanent Life Insurance
| Term Life Insurance | Permanent Life Insurance |
|---|
| Designed for shorter term needs |
Designed for longer term needs |
| Lower initial rates increase at regular intervals |
Higher initial rates don’t increase at regular intervals |
| Coverage ends after a set period of time and does not build cash value |
Coverage can last for life and builds cash value |
Why Choose Term Life?
Term life is usually the way to get the most coverage for the least expensive premiums now, with the understanding that rates will go up as you age.
Why Choose Permanent Life?
Permanent life can provide premiums that won’t go up due to your age, plus cash value that can accumulate over time and can be borrowed against.
Deciding How Much Insurance You Need
As a start, you’ll want to look at the resources your beneficiary already has – like savings, Social Security, a pension or other insurance policies. Then think about expenses they will face -- for example funeral costs and medical bills you may leave behind as well as the ongoing costs of maintaining their lifestyle.
Adding to Insurance You Have
If you purchased insurance awhile back, it's worth considering the effects of inflation. You'd need $1.28 in 2009 to equal the buying power of $1.00 in 1999, so what seemed like plenty of coverage back then may not be enough now. Another thing to think about is whether your needs have changed, particularly if it's been many years since you last thought about your insurance needs. SOURCE: http://www.dollartimes.com/calculators/inflation.htm
Planning for the Future
Helping to cope with immediate expenses is the first thing that most people think about when purchasing life insurance. But you can also use it to help secure your family’s future. Even a relatively small amount of insurance can be enough to pay for a year’s college tuition for a grandchild, help with the down payment on a house or simply start a savings fund for someone you care about.
This article is provided by New York Life for informational purposes only. Neither New York Life, AARP nor its affiliates provide tax, legal, financial or accounting advice. Please consult your own professional for advice specific to your circumstances.
The AARP Life Insurance Program
The products in this Program are offered by New York Life Insurance Company exclusively to AARP members – and were chosen with the needs of members in mind. We’d be glad to send you a free information kit by mail, including a rate quote and application form.
Get a Free Information Kit »