Life insurance 101

Record-Eagle/Dan Nielsen 

Allstate insurance agent John Weber works in his office at 2301 Garfield North.

TRAVERSE CITY — Life insurance hardly ever comes up as a topic of everyday discussion.

Any serious conversation involving death is emotionally awkward. The idea seems ridiculous to young folks who haven't yet internalized the idea of their own mortality. The topic is scary for those of middle age or beyond.

Insurance agents sometimes gained a bad rap for bringing up the "what if" topic. But they just want to help their clients avoid the possibility of family financial implosion if tragedy strikes.

"It's just so important for everybody, especially families, to have a life insurance policy," said John Weber, a Traverse City agent for Allstate Insurance.

Car insurance is required to register a car. Home insurance is required by mortgage contracts. Life insurance only rarely is required by government or business arrangements, so it's easier for the typical citizen to let it slide.

"Most people have to be educated a bit more about life insurance," Weber said.

Committing to a monthly or annual outlay of cash devoted to the possibility of death is difficult. It can be impossible when economic times are tough for a family. But after a family builds a financial cushion, it may be time to consider life insurance. 

The concept behind life insurance is simple. If someone dies, his or her income — and potential for future income — disappears. Life insurance converts regular payments during a person's life into a payout when that person dies (and in some cases before). His or her significant other, family or business partner then can use the insurance money to continue their existence without financial hardship.

"Nobody thinks they're going to die early. But you see reminders of that all the time," said Traverse City-based State Farm agent Susan Rauser. "If you're young, you can get life insurance for $20 a month."

Choosing a policy from the variety offered by insurers can appear a daunting task, but it usually boils down to one question:

"It has to with what they are trying to protect," said Bryan Taggart, a certified financial planner and a principal in Larkin Group Insurance Agency.

The bare minimum life insurance policy traditionally has been sized to cover funeral expenses. Such a policy at least insures that survivors won't need to dig into their own pockets to pay for services.

Many policies are purchased to protect something like a home mortgage, a business loan, expected college costs or continued family income.

All types of life insurance can provide money for those and other uses. Defining exactly what it is that an individual wants to protect is the first step to selecting a policy. It also guides the rest of the choices made in selecting a policy.

Most life insurance policies are one of two types — term and permanent.

Term insurance is only active for a set segment of time. When the contract period ends, so does the insurance. People who buy such policies typically are only worried about expenses for that set amount of time. Once that period ends and they're still alive, the thing (mortgage, college costs, etc.) they were trying to protect is past the critical point.

"Once kids turn 25, there might not be as much need for coverage," said Rauser.

Since term life policies disappear at the end of the term (10, 15 or 20 years), the insurance company's liability also disappears. Term policies generally cost less than permanent policies.

"Term life often times is easier to understand and is less expensive," Taggart said.

Permanent life insurance policies come in two basic types: whole and universal. Both types are intended to be in effect for the entire life of the insured person.

Whole life insurance policies offer consistent premiums and guaranteed cash value accumulation. Universal life insurance policies offer more flexibility in premium payments, death benefits and the savings element of the policy.

Taggart is a proponent of universal life policies. They can help customers pass wealth on to the next generation, he said.

Permanent life policy premium payments generally continue throughout the insured person's lifetime. Universal life policies allow the insured person to borrow money against the policy. If they don't repay the loan, the final payout to the beneficiary is reduced by the amount of the loan.

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