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You and Your Money

PERSONAL FINANCE: Understanding Life Insurance

Life insurance varies with the various people seeking it. It depends on a number of factors such as dependents, level of income as well as the saving capability you have. There are a number of life insurance companies in the market today each offering more competitive packages than the other in their bid to get the most customers.

The various type of life insurances include whole life insurance which is the most common type selected by various individuals. The premium paid is constant over the life of the policy and stays in effect until your death. It comes with the benefit of a saving element which is tax deferred and the policy holder can even stop paying premium at a certain time or take a policy loan from it. The advantage of this loan is that you are not allowed to choose different investment accounts as the company determines how the premium is invested. It also does not offer premium flexibility as the premium is constant for life. It is not a good option for those who are adapting to insurance or for retirement plans that are subject to significant changes.

Variable Life insurance comes with the provision of permanent protection to your beneficiaries upon your death. It is variable because of the flexibility that allows use for allocating your premium money in various separate accounts for different investment funds
within the portfolio of the insurance company. The earnings are tax free until the policy is surrendered and you can also apply for interest rates for the premium thus reducing the amount paid. The disadvantage of this type of insurance is that the investment risks
are your responsibility and that you cannot withdraw any cash from the investment while alive.

Also called Flexible Premium Adjustable life insurance, Universal life insurance comes with a savings element just like whole life insurance that is tax deferral. The company will invest a part of the premium in a number of accounts such as bonds, mortgages and money market funds. The advantage of this life insurance option is that you will be guaranteed a certain minimum amount of return on your premium no matter how the investments fare. You are also allowed to select between two death benefit options. One benefit involves receiving the benefit from policy cash value while the other will have the beneficiaries receive the stated face value stated in the contract and any cash values accumulated over the years. The disadvantage is that the insurance could lapse if the premium payments are too low leaving you and your loved ones unprotected. Poor investment will also decrease the return interest though not below the agreed minimum and thus you will be required to pay more in later years.

While selecting these insurance types it is important to assess the needs of the family in the present and the future to enable you determine the amount of money you can put aside for life insurance. You should also review your insurance needs at least once a year to accommodate the various changes that have taken place. It is therefore important to educate yourself on various insurance basics to enable you make the right choice.

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