Term vs. Permanent Life Insurance

In a world where money is tight we often find ourselves choosing between
paying for the "must haves" and neglecting the "should haves." Life
insurance, unfortunately, is a perfect example of this. We all know that we
should have life insurance to at least cover our final expenses, but many of
us don't purchase life coverage because it's just one more thing we'd have
to spend our hard earned money on, and—let's face it—we've got a lot of
other bills wanting our monetary attention.  
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The problem with this sort of thinking is that life insurance really isn't a
"should have;" it's a "must have."

Thinking about life going on after we're gone is a little scary, but the fact is
that it does, and someone you love will be left with funeral and other
expenses that they'll have to meet without you. Now, there are plenty of
people who believe that their social security benefits will be enough to at
least pay for their funeral, but the truth is that social security pays a death
benefit of only $250—a far cry from the $6,000 average cost for a funeral
today! On top of that, your loved ones will be left with mortgage payments
and other living expenses. Life insurance is an excellent way to cover those

The two main categories of life insurance are term and permanent life

Term life insurance policies are sold for a fixed number of years that
matches your needs. Term life policies are often sold for terms of 10 or 20

You may decide that you and your spouse will have enough income from
Social Security and retirement pensions when you retire in 10 years. As a
result, you decide you only need a policy in case you die in the next 10 years.

A term life insurance company underwrites your policy, using historical data
on insurees with similar risk characteristics to calculate a premium.
(Relevant risk characteristics include your health history, age, and gender.
You complete a health condition questionnaire and physical exam in order to
obtain a certificate of insurability.)

Once you receive a quote for a term life policy, you make level premium
payments for the term of the policy. If you die before the end of the term, your
beneficiary receives a death benefit. With term life insurance, your policy
lapses if you stop paying premiums.

When the policy term ends, you generally have the option to renew, but at a
higher premium. A higher premium reflects a greater likelihood of your death
during the renewal term. (You're older, after all.) Insurers like to say that your
mortality risk is higher, justifying the higher premiums.

There are several forms of term insurance:

•        Level term -- you pay a fixed premium for up to 20 years. This can be a
good deal, since it protects you against the effects of inflation and
unexpected changes in your health that would warrant higher premiums.

•        Annual renewable term -- gives you the option of renewing your policy
regularly, but at increasing premium rates.

•        Decreasing term -- features a steadily decreasing death benefit. This
might seem undesirable, but it can be sensible for many people. You may
need a bigger benefit when you're a young breadwinner with a family to
support than when you're a retiree with grown children and a nice nest egg.

Permanent life insurance is different from term life insurance. For one,
permanent life insurance provides coverage until you, the policyholder, die.
You may cancel, or surrender, a permanent life policy but will likely have to
pay a surrender charge. Surrender charges are like paying a back-end load
when you sell shares of a mutual fund—it lowers the investment
performance of the policy.

A second major distinction of permanent life insurance is that your policy
builds up a cash value. Cash value is also called cash surrender value
(CSV). This buildup in cash value occurs because you invest a part of your
permanent life premiums.

How these premiums are invested is what determines what type of
permanent life insurance you have. The most common types are whole life,
universal life, and variable life insurance.

For example, you may pay $1,000 in premiums over a 12-month period. If the
premiums are invested and increase in value, the future premium necessary
to keep your policy active may drop to, say, $500. As a result, your premiums
accumulate a cash value of $500 after the first year.

Your cash value is the amount you are entitled to if you cancel your policy.
With some types of permanent life insurance, you can use the cash value in
your policy to adjust either your death benefit or premiums. Alternatively, if the
cash value of your policy declines, your death benefit may also decline.

Cash value is a personal asset. You should include this asset when you
prepare a statement of your personal net worth. When you apply for a loan,
for example, you should disclose the cash value of an insurance policy as a
personal asset. You can also use the cash value of an insurance policy as
collateral for a loan request.

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For many of us, our health insurance benefits are the most important
employee benefit. This may be especially true considering an estimated 47
million Americans -- many of them working Americans -- lack basic health
insurance according to an August 2007 report published by the U.S. Census.
Before you have a medical emergency, it's important to know how to
understand the basics of your health insurance benefits. Some of the basic
features include:

Premiums. You want to know how much your monthly insurance premium is
and whether your employer pays a part of it. Monthly premiums can easily
reach $100 for single persons and two or three times that amount for

Employers often obtain health insurance for their employees with a group
policy. By spreading the risk among more insureds, group insurance plans
are often able to obtain more affordable premiums.

Deductibles. A deductible is the amount you pay the physician before your
insurer pays its share of your medical bill. Generally, the larger your
deductible is, the smaller your premium. You may wish to consider
increasing your deductible in exchange for a lower premium. Higher
deductibles are a common way for insurers to make insureds share in the
cost of health care.

opayments. A copayment is the amount you pay when you visit a doctor.
Like a deductible, a copayment is a means of sharing the costs of health
care to discourage excessive use of benefits. Copayments are often in the
range of $5 to $25 -- not too much but high enough to discourage frivolous
use of your benefits.

Out-of-pocket expenses. Out-of-pocket expenses are the costs you have to
pay, in total, before an insurer pays for any remaining amounts. Amounts you
pay as deductibles are included in your out-of-pocket expenses, which are
kept as a running total. Most health insurance plans also have a yearly
maximum for out-of-pocket expenses that you have to pay. Once you have
reached your maximum for the period, you're usually done paying for that

Coverage of services. When it comes to the coverage of medical services,
some employer-sponsored health plans are simply more generous than
others in the scope of services that they cover. You should be aware of any
procedures or medical disorders that your health insurance plan does and
does not cover.

Ancillary care. A good health insurance plan pays for visits to a doctor.
However, a more comprehensive plan also provides benefits coverage for
such ancillary care as pharmacy and vision. Dental insurance is often
offered as a separate benefit but it may also be included in a comprehensive
health insurance plan as a policy rider.

Health insurers often contract with a network of doctors to provide health
care for insureds. These networks are often managed care networks, which
include health maintenance organizations (HMOs). HMOs focus on providing
preventive care by encouraging early diagnosis (when treatment is cheaper).
HMOs actively use copayments, deductibles and out-of-pocket expense
caps to manage health care costs.

With managed care, you select a doctor from a roster of physicians in your
area. This physician is called your primary care physician. You use your
primary care physician as a gateway for your health care, obtaining a referral
from him or her to obtain specialized medical care. This gateway approach
is another way that managed-care networks seek to control health care
inflation, which has easily outpaced general inflation over the past decade.
Health care critics argue that the gateway process penalizes consumers by
slowing down the time it takes to receive timely health care for specialized
needs. In spite of these criticisms, HMOs and other managed-care networks
have become the dominant system for providing health care in the U.S.
Another type of health care insurance is fee-for-service health care. Fee-for-
service care is more expensive than HMOs since it is a pay-for-what-you-get
insurance system. Fee-for-service health care plans use a network of
physicians called preferred provider organizations (PPOs). An advantage of
fee-for-service health insurance is that you have more latitude in choosing a

A major issue in health care today is declining reimbursement rates,
particularly with respect to Medicare reimbursements. Health insurers often
use a contracted reimbursement system to pay physicians and rely on a
similar system to be reimbursed by Medicare. For example, an insurer might
reimburse a doctor or hospital $10,000 for a kidney dialysis, or $5,000 for a
birth given by Caesarean section. However, if Medicare is reimbursing at
lower rates, the health insurer eats the difference and is forced to increase
insurance rates.

When you receive health insurance, you often have an open-enrollment
period. Open enrollment is generally a once-a-year period that lets you
modify your insurance coverage. If you give birth to a child or have a change
in your marital status, you are allowed another opportunity to modify your
health insurance coverage.

If you and a spouse have your own health insurance plans with the other
spouse as a beneficiary, you should see how each spouse's plan affects the
other. Health insurers use coordination of benefits to determine which
insurer pays for which services and to prevent from paying twice for the
same procedure or visit.

If you anticipate paying health care costs each year that your employer does
not reimburse, you may wish to set up a health care reimbursement
account. These accounts let you make before-tax contributions to fund the
account during the year, potentially saving you hundreds or thousands of
dollars in taxes. Health care reimbursement accounts are also called
cafeteria or Section 125 plans after the section of tax code that governs their

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Insurance premiums are also called insurance rates. Here are some of the
major factors that affect insurance rates and what you can do to lower them:

Increase your deductible. A deductible is the dollar amount you pay before
the insurance company pays your claim. By increasing your deductible, you
increase your share of the risk to insure you. It may seem counterintuitive --
paying more when you want the insurer to bear the risk of loss but what you
really want to insure is the risk of a large, catastrophic loss.

Eliminate or reduce unnecessary coverage. Some auto insurance such as
collision or comprehensive coverage is aimed at protecting your vehicle and
providing for medical expenses. If you have health insurance coverage and
your insured vehicle is not very valuable, you may not need the extra

Drive a car with low theft loss and accident history. Check with the
Insurance Institute for Highway Safety (IIHS/HLDI) for theft loss and accident
statistics of your auto. In addition, your insurer is likely to offer a discount if
you use a car alarm or other anti-theft device.

Drive safely. Safe driving is an important way to avoid accidents in the first
place. Put another way, obtaining auto insurance doesn't give you license to
drive recklessly and endanger others. Over time, a safe driving record
means fewer claims and lower risk. Insurers will reward you for these good
habits. Insurers are likely to offer a discount if your auto uses air bags,
seatbelts, safety-harnesses, anti-lock brakes or running lights.

Drive less. Some insurers offer discounts if you limit the number of miles
you drive or use alternative transportation to get to work. The fewer miles you
drive, the less likely you are to have an accident and file a claim. Insurers
often discount your rates if you use alternative transportation for work.
In essence, prudence helps to lower your insurance rates. Examples of
financial prudence include paying a higher deductible or obtaining lower
coverage limits. Examples of driving prudence include establishing good
driving-safety habits, using vehicle-safety equipment and avoiding
unnecessary driving.

The above information is educational and should not be interpreted as financial advice.
For advice that is specific to your circumstances, you should consult a financial or tax