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Best type of life insurance – the differences and benefits of each type.

 The best type of life insurance depends on your individual insurance needs. Thus, you need to first determine how much coverage you need and then how long you need it for. These two things will allow you to match up the various types in the correct combination of coverage amounts, premiums, and how long you need the coverage for.

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 Here’s a few examples of possible amount/combinations:

  1.  Family coverage for parents: You assume that you need to replace about 10 times your gross income while the kids are home. You conclude that you need $500,000 for about 20 years after which you don’t want any life insurance.
  2.  Final expense: You want to pay for burial expenses when you pass, plus leave a bit of an inheritance to your children or grandchildren. You conclude that you need $50,000 of coverage, but need the coverage for your entire life.
  3.  Both of the above, together: You conclude that you need $500,000 of life insurance for about 20 years, then you only need $50,000 for the remainder of your life.

 When you focus on your life insurance needs in this fashion, we’re entirely focused on the death benefit over a period of time. We move away from investments, good or bad types, and all the other confusion you’ll be bombarded with when reading about the various types. Specifically, when approached this way, we only care about the cheapest life insurance policy for a specific amount, over a specific period of time.   

 Life insurance premiums over time – two types

 When looking at life insurance premiums over time, the basic categories are ‘cheap now, but more expensive later’ and ‘more expensive now, but cheaper over the long run’.   

 Term life insurance has premiums that are level for a number of years (e.g. 10 years, 20 years, or 30 years). It’s inexpensive during the initial level ‘term’ timeframe, but prohibitively expensive after that. So it’s very suitable for people looking for life insurance for 10,20 or 30 years, but don’t want or need coverage after that. So we take it while it’s cheap, then when it gets expensive, cancel it.

 Permanent life insurance has premiums that are level for life. It’s more expensive than term upfront, but because the premiums remain level and term premiums go up, over the long term it becomes cheaper than term.  

 So, if you’re looking for life insurance for a defined period of time, the best type of life insurance will be term life insurance. If you’re looking to keep life insurance over your entire life, the best type will be permanent (and to add to this, make sure you’re looking at fully guaranteed permanent life insurance – if it has non-guaranteed portions, or investment related, proceed with caution). Now, lets apply this to the above three scenarios to get the best type for each situation.

  1.  Family coverage for parents: $500,000 of 20 year term.
  2.  Final expense: $50,000 of permanent life insurance.
  3.  Both of the above, together:  $450,000 of 20 year term, with a $50,000 permanent coverage level. Note that you can often combine different coverage types within one policy.

 It’s important to remain focused on the coverage amount and timeframe – don’t get distracted. If you stay focused on these things, you’ll assure yourself of having the best life insurance for your individual needs.

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