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How to Buy Life Insurance

by P.A. Patterson
The Black Collection online

College is a time when passing a calculus exam, getting that history paper done on time or landing a first job may seem to be the most important things in your life. Once you graduate, paying rent, car notes, student loans and building a wardrobe for your new career become big priorities. Insuring the life that's trying to accomplish all of these things is the last thing on most college students' or recent graduates' minds, even though it's something you as a college student should consider.

Life insurance policies pay a certain amount of money to a designated person, such as a spouse, parent or child when you die. When you're in your late teens and early twenties, the end of life appears – and often is -- a long way away. On top of that, you may not have a husband, wife or children who would benefit from a life insurance policy if you do die unexpectedly. So does that mean life insurance isn't for you? Not necessarily.

Why Insure?

In college, and in the years immediately following, many young people accumulate more debt than they realize in the form of student loans, credit card bills and car loans. If you die, parents, or if you married early, a husband or wife, are often left with a pile of bills.

Young people need to ask themselves "who would be responsible for my financial obligations – car loans, school loans? Typically it's the parents," said Sherri Lagana, a chartered life underwriter and chartered financial consultant at Boston-based Liberty Mutual Insurance Group, Inc. "If something happens to them, do they want to make sure their parents have money to take care of their obligations?"

While you're in school and possibly for a few years after graduation, your parents may have life insurance policies taken out on your behalf. If you're considering buying insurance for yourself, it may be good to ask your parents what, if any, kind of coverage they have on you and how long it will last?

Still, even if you are covered by a parent's policy, there are other reasons to get insured, said Michael Brazzell, a chartered life underwriter with State Farm Insurance Cos. in Bakersfield , California .

"You're not always going to be young, and you're not always going to be healthy," Brazzell said. "Life insurance is never going to be as inexpensive as it will be for college students."

The younger you are when you buy life insurance, the cheaper it will usually be in the long run. Also, health examinations are usually less involved for people under age 30, Brazzell said. As you get older, your risk of death from medical conditions such as diabetes or cancer increases and could impair your ability to get coverage at all.

Buying the Best Insurance for You

Buying life insurance is a personal decision and what type of policy you choose is based on your individual needs. Talking to an insurance professional about your obligations and goals is the best way to determine a plan. However, a little basic knowledge about the types of coverage out there, before you sit down with an agent or financial planner can help you make informed decisions that will help you protect your loved ones and possibly provide some needed funds later in life. The three types you'll need to consider are permanent, term and universal.

Permanent or Whole Life

You don't have to die to benefit from life insurance. Permanent life insurance, also referred to as whole life insurance, "accumulates cash value, which can be borrowed against with the option of repaying or not," said Clydell Topp, a financial services executive with MetLife Financial Services in Chicago .

Specific terms may vary by company or policy, but whole life policies usually allow you to take out a policy loan. Any loan and interest on the loan that you do not pay back will be deducted from the benefits if you die, or the cash value if you stop paying premiums, according to Topp.

"It's similar to a mortgage," said Lagana of Liberty Mutual. "It doesn't accumulate all at once. Some of the money goes towards the (death benefit) and some toward the cash value."

Some permanent policies also pay dividends once a year. Other policies such as variable life insurance are set up similarly to mutual funds. The cash value portion is invested in stocks and other investment accounts. The cash value is then dependent on how well the investments perform, which provides an opportunity for the policyholder to accumulate even more money, but like any money that is put into the financial markets, it does add some risk to the cash value portion. The death benefit is usually guaranteed.

Term Life

Another type of policy to consider is term life insurance. This type of insurance can be purchased separately and many employers often add a small amount of term insurance to their benefits package.

While insurers compare permanent life insurance to a mortgage or buying a house, they characterize term insurance as being similar to renting. When you buy a house, each payment gives you equity in the property. When you decide to sell it, you can get that money back, or borrow against it in the form of a home equity using the house as collateral to guarantee that you'll repay the loan. Buying term life insurance is more like renting -- you pay a landlord money to use their space on a temporary basis.

Term insurance premiums (or payments) are often lower than a permanent insurance policy, but you don't accumulate cash value and when you stop paying premiums, your coverage is completely gone. When you buy a whole life policy, it's possible to pay the entire cost of the policy and still have a death benefit as well as some cash value.

Sometimes having a mix of term and permanent policies for a certain number of years fits an individual's financial needs best. The best way to determine this is to talk to your insurance agent or financial planner.

The policies that are offered at work are almost always term policies and usually are not enough, said Topp of MetLife. Usually the amount is one to two times your annual salary, and for a family, this is usually not enough coverage, he said. For example, if you make $40,000 a year, a company that offers one times your annual salary would pay your beneficiaries just $40,000.

Another reason not to depend solely on policies offered at work is that in the majority of cases, when you leave the company, the insurance is gone.

"The average person changes jobs three times in a seven-year period," said Brazell of State Farm. "Employer plans are term insurance. You don't own the plan and you don't build cash value. You want to have some control."

If you are laid-off or fired, you may be without insurance, and therefore unprotected, for a long period. When you do get a new job, your new benefits may not kick-in right away, extending the time that you're at risk of having something happen while not being covered.

Universal Life

Universal life insurance allows you to vary your premium payments each year and even skip a payment if you want. The money that you pay into the policy earns interest and charges for the policy are deducted from the account. Insurance coverage continues as long as there is enough money in the account to pay the insurance charges, according to Topp at MetLife.


Life insurance doesn't have to be very expensive. For example, people can get a term policy from State Farm in their teen-age years for as low as $10 a month for females and $11 a month for males with a death benefit of $50,000. At age 40, that policy can be converted to a permanent policy. A 16 to 20-year-old can get permanent policies as low as $16 a month that build cash value and have a death benefit.

At Liberty Mutual, a 23-year-old can buy a permanent policy that provides cash value and a $50,000 death benefit for $27.69 a month. A term policy with a $120,000 death benefit bought at age 25, that would expire at age 70, can be purchased for $17.50 a month.

Key Considerations

The insurance policy you buy is important because it can provide peace of mind to your loved ones if you die. Depending on the type of insurance you buy, you can also accumulate a nest egg to use as a down payment for a house, medical expenses or anything else you may need. To make sure you're spending your money wisely, do some research and don't be afraid to ask questions. Some key considerations include:

  1. Will this company be around for me, and my loved ones, in the long-term?
    What is their track record? Is the company financially sound?
  2. Make sure the death benefit doesn't have a lot of restraints attached to it.
  3. Read the policy – even the fine print and make sure you understand it – especially if you buy a policy online or through a television or mail offer.
  4. If it sounds too good to be true, it probably is.
  5. Schedule periodic reviews of your insurance coverage with your agent to make sure your coverage is still adequate.

P.A. Patterson is a New York-based financial journalist.



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