Definition:

Insurance that provides protection against the economic loss caused by the death of the person insured. *©LOMA Glossary of Insurance Terms

Why Life Insurance?

Life insurance provides financial protection. A life insurance policy can provide cash resources for your dependents after you die. This money could save your family from selling assets to pay bills or debts and could provide for educational or other large future expenses you foresee. Also, your dependents will not have to pay federal income taxes on life insurance benefits.

Do You Need Life Insurance? You most likely need insurance if you: have dependent children, a stay-at-home or financially dependent spouse or an aging parent who depends on your support; have a significant amount of assets or own a business; or want to supplement your retirement savings.

How Much Insurance Do You Need? Your particular insurance needs will depend upon your age and stage in life, your net worth and earning potential, the number and age of your dependents and their likely needs in the event of your death.

There are two main types of life insurance: term insurance and permanent insurance.

Term Insurance

Term insurance provides financial protection for specified periods of time, paying a benefit only if you die during the term. Terms may be one or multiple years. Some policies allow you to renew at the end of the term, with an increase in premium rates at each renewal date.

Term policies tend to be less expensive than other insurance types, and can be beneficial for the young or for families on a limited budget that need a large amount of life insurance protection.

Permanent Insurance

Permanent insurance provides lifetime protection, as long as you continue to pay the premiums. These policies are designed and priced to keep you as a customer for extended periods of years. There are different types of permanent policies-you may have heard them called whole, ordinary, universal, adjustable and variable life.

• Whole or ordinary life offers premiums and a death benefit that typically remain constant over the life of the policy.

• Universal or adjustable life allows you to adjust the death benefit and your premium payments, within certain limits, to fit your financial situation.

• Variable life policies allow you to select a portfolio of investments. Based on the performance of your investments, the death benefit and cash value vary. Typically, the cash value and death benefit grow more quickly in a variable life policy than in other types of policies, but there is also more risk. The cash value and death benefit could decrease with poor market performance. However, some policies will guarantee the death benefit to not fall below a minimum level.

Unlike most term insurance, permanent life insurance allows you access to the cash value of a permanent insurance policy, which increases over time tax-deferred. You can borrow against the cash value to help pay the policy's premiums or other expenses but such policy loans may reduce the death benefit. You could also cancel the policy and use that accumulated cash value at your discretion, but you may owe taxes on part of the cash value if the sum exceeds what you have paid in premiums.

Tips on Buying Life Insurance

• Check with your state's insurance department to make sure the company is licensed in your state.

• Life insurance decisions are complex and will affect your family at a time when they are most vulnerable, therefore, you want to be sure the company you choose is reputable and ethical. A good place to start is to look for the IMSA logo. The IMSA logo can be displayed only by an insurance company that has been successfully measured against IMSA's Principles and Code of Ethical Market Conduct.

• Be sure the company is financially strong. Many independent services rate the financial strength of insurance companies, such as A.M. Best Company, Fitch Ratings, Inc., Moody's Investor Services Inc. and Standard & Poor's Insurance Rating Services.

• Ratings may vary among services and slight variations are normal, such as between AAA and AA. Be aware that not all companies choose to be rated by every service, since rating services charge a substantial fee for such comprehensive reviews.

• Before you select an agent, be sure he or she is licensed to sell insurance in your state. Agents who sell variable life insurance products must be registered with the National Association of Securities Dealers and have additional state licenses.

• Ask your agent to explain the sales process he or she uses. Most professional agents utilize a needs analysis process prior to recommending a life insurance, annuity, or long-term care insurance product. Needs analysis is the process of determining your insurance needs by building a profile about you. It includes such things as the needs of your spouse or family should you die prematurely, your assets, your risk tolerance, your retirement needs, your net worth, etc. The agent will be in a much better position to recommend the appropriate insurance product for you if he or she has all the facts.

• Before meeting, ask the agent which companies he or she represents and what types of products these companies sell.

• Always check the date the insurance becomes effective.

• When you purchase a policy, make your check payable to the insurance company and be sure to get a receipt.

IMSA Member Companies

To locate an IMSA member insurance company, click here.