If you have dependents, you may be worried about what will happen to them if you’re no longer around. Buying life insurance now helps to protect them in the event that something happens. After you’re gone, your family will be able to use the proceeds to cover mortgage payments, funeral costs, college tuition and other expenses.
The two main types of life insurance are term and permanent. Term life insurance has a lower costs, and is also the easiest to understand. Typically when we think, of permanent insurance, we think of whole life insurance. Whole life insurance tends to be more expensive, but it offers additional benefits, and is therefore the most well-known type of permanent life insurance coverage. Other types of permanent life insurance are variable, universal, and variable universal.
Let’s look at the difference between term life insurance and whole life insurance:
Term life insurance is often referred to as “pure life insurance” because its only purpose is to protect your dependents in the event that you die prematurely. It only provides coverage for a certain time period. If you have a term policy and you die within the term, your beneficiaries will get the death benefit. This policies typically have terms anywhere in the range of one year to 30 years. In most cases the premium remains the same thought the whole term.
The most common term is 20 years, but it’s important that you pick a term that works for your family. Make sure it mirrors the years your family would be most financially vulnerable. The payout would serve as both a replacement for your income and and a means to pay for services you currently provide, such as child care.
If you’re raising your children or paying off your mortgage and you need life insurance for that period, then term life insurance is the right choice for you. If you think you may want permanent life insurance, but can’t afford it, it’s a good idea to get term life coverage in the meantime. The majority of term life policies are convertible to permanent coverage.
Whole life insurance provides lifelong coverage. It also involves an investment component known as the policy’s cash value. The cash value grows slowly and it is tax-deferred. This means that while its gains are accumulating, you won’t pay taxes on them. You have the ability to borrow money against the account, but if you don’t repay policy loans with interest, your death benefit will be reduced. You can also surrender the policy for cash, but you will no longer have coverage if you do this.
While the rules of whole life insurance may seem complicated, it is the most straightforward kind of permanent life insurance. The death benefit is guaranteed, the premium remains the same for your whole life, the cash value account grows at the guaranteed rate.
Whole life insurance is a good option if you need coverage for the rest of our life. This can be because you want to provide money for your heirs to pay estate taxes, or if you have a lifelong dependent, such as a child with special needs. It’s also ideal if you would like to spend your retirement savings, but you also want to leave a legacy for final expenses like funeral costs.
Hopefully after learning more about the differences between term life insurance and whole life insurance, you can figure out which type of insurance is right for you.