PhotoIt's not a subject we like to think about, but it's prudent to plan for your death. Usually, part of that plan will include a life insurance policy.

Life insurance is most important when a family is young. In previous generations a husband took out a policy to provide for his wife and children should something happen to him. Today, it's usually important for both husband and wife to be covered since the family may depend on both their incomes.

Buying life insurance is an important financial decision and shouldn't be taken lightly. Christine, of Old Lyme, Conn., realizes she needed to ask more questions when a Colonial Life and Accident agent signed her up at work.

Miscommunication

“He told me this 'term' policy was what I needed,” Christine wrote in a ConsumerAffairs post. “Seven years later, when I was cut back on my hours and needed to re-think the deduction, I contacted the new agent and she told me that all the money I had contributed in this term policy would be gone! I could not change policy, I could not touch the money I contributed, and she was very sorry. Seems that the previous agent did not explain things to me, and I did not ask questions.”

Christine admits that she was naive when she signed up for the policy but her real problem is that she did not understand what she was buying. She purchased a “term” policy and not permanent insurance. Term insurance is in force only as long as you continue to make the payments. Once you stop the payments, the coverage ends. It's like renting your insurance.

The advantage to term life is that it costs much less than other types of policies. If you only want insurance coverage over the 25-year period that your children are being born and growing up, then a term policy may be just what you need. Once the last child graduates and gets a job, you let the policy lapse.

Christine apparently believed she was getting a policy that would eventually be paid up, or have a cash value that she could redeem should she cancel. These policies typically cost more and may or may not be a good use of your money.

Not always good investments

Whole life policies, for example, are more expensive because it is generally assumed they will be in effect longer than term policies and therefore, the odds the company may have to pay off are greater. Many financial advisers caution that non-term policies are generally not a good place to put your money. And because the products are so costly, a consumer typically under-insures, buying less coverage than they need.

A term policy, on the other hand, provides more coverage per dollar, allowing you to put the savings into more productive investments. The key, of course, is actually investing your savings. If you do, you should have a significant nest egg by the time you discontinue your term policy and can, in effect, self-insure.

Before considering the purchase of a life insurance product, learn the basics. Make sure you understand the difference between term insurance and permanent insurance.

When it comes time to purchase an insurance policy, make sure you buy the right kind for your needs. Once you understand the differences in policies it will be easier to avoid these mistakes.

How much?

How much insurance do you need? You need to answer this question before making a final decision. If you have a young family, both spouses need a policy that will provide enough money to help meet the family's needs for several years.

Buy insurance when you are young. Insurance is all about odds, with the company betting you won't die and you betting you will. The numbers suggest a 25-year old has a better chance of staying alive than a 45-year old. When you purchase life insurance when you are young and in good health, you'll get a better deal.


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