(repost from http://consumerist.com/)
1. You need a higher death benefit than you think.
A $1 million dollar policy may seem like a lot, but if you have a spouse and two young kids who aspire to college someday, and you have some debt, $1 million may not get them very far if you want them to maintain the lifestyle they’ve become accustomed to.
How much coverage you need depends on your salary, whether or not your spouse works, if you may need child care, and the debt you may leave behind: college tuition, credit card bills, a mortgage, and more. Try these calculators from LifeHappens.org and MSN Money for help. Also check out BankRate.com’s Life Insurance Cheat Sheet.
2. Life insurance comes in several flavors, and you need to pick the right kind.
Term insurance will cover you for a set time period, and at the end of the period, you’ll no longer have insurance. This is often a good choice for young families who can’t afford permanent insurance, or for those who only want to be insured for a certain time period.
Permanent insurance will give you coverage for as long as you pay the premiums (and sometimes longer), and in addition to the insurance part, it also has an investment component. It comes in different flavors — whole, universal and variable — and they offer different investment options and the ability to use your cash value to pay premiums.
The other important difference is cost. Term policies are generally much less-expensive than any kind of permanent insurance, which charges additional fees for the investment component of the policy. Try BankRate.com’s calculator to decide which kind is best for you and use the Insurance Information Institute’s glossary to make sure you understand all the terms in any policy you consider.
3. Do you need permanent insurance, or does your salesperson need a high commission?
We’re not saying that permanent policies are bad, but they are costly, and they do offer your insurance agent a higher commission. If your agent keeps pressing the investment component of a permanent policy, take a step back.
If you bought a term policy and invested the difference you would have paid for the permanent policy, how much of a nest egg could you accumulate? We’re not saying it’s impossible for the permanent policy to do better, but if you want insurance, buy insurance. If you want an investment, buy an investment. The added layers of fees and fewer investment options that come with permanent policies make it likely that an index fund or exchange-traded fund will do you better in the long run. And yes, before you salespeople start sending us nasty e-mails — permanent policies do have tax advantages, but so do 401(k)s and IRAs.
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