Purchasing life insurance nowadays gives you and your loved ones financial security for a later time, should you not be around to take care of them anymore. It may be a morbid discussion but let’s be realistic here – when you’ve passed away, your family can use the amount to cover costs like mortgage payments, student loan debt, and even your funeral costs.
There are two kinds of life insurance, mainly term life insurance and permanent life insurance policies. There are major differences between term and permanent life insurance policies. Today, we will simplify and break it down for you to be able to choose the best policy for your situation.
Term life insurance. This is the easiest one to understand and it also has the lowest price that may just fit your budget. It is also possible to get quotes online.
What type of coverage does this offer? This type of insurance provides you coverage for only a certain time period. This means that it is only designed to protect your dependents in the event that you die prematurely. If you have this type of policy and you pass away within the term, your beneficiaries will receive the payout and the policy has no other value after that. You do have the option to choose the term when you purchase the policy. The most common terms are 10, 20 or 30 years. Majority of the policies, the death benefit or payout, premium or cost, stays the same throughout the entire term. Keep in mind, when you are canvassing for term life insurance, you should look for:
- Select a term that goes together with the years you’ll be paying bills and you want life insurance coverage, just in case you have an untimely death.
- If you have a family of your own, purchase an amount you best think that can provide to them, should you no longer be there to provide to them yourself. The payout could help replace your income and assist your family in expenses such as childcare.
The most ideal situation would be, is that your family’s need for insurance will end around the time that the term insurance will expire. You’ll have paid off your mortgage, your kids have completed their education and are already on their own, and you’ll have some extra money in your savings as a financial safety net.
Permanent life insurance. This type of policy is a bit more complex and has a tendency to cost more than term life insurance but it does have additional benefits. There are several kinds of permanent life insurance: whole life, universal, variable and variable universal. The simplest form and most-well known is the whole life insurance. Like most permanent life insurance policies, whole life provides lifelong coverage and includes investment options known as the policy’s cash value. The cash value grows tax-deferred and slowly, which means that you won’t need to pay taxes on the gains while it’s accumulating. You can borrow cash against the account or you can even surrender the policy later on for cash. However, if you don’t repay the policy loans with interest, you will reduce your death benefit. If you surrender your policy, you will no longer have coverage as well. Even though this type of insurance is more complicated than term life insurance, it is the most straightforward kind of permanent life insurance. This is why:
- The premium or amount you need to pay remains the same for as long as you’re living
- There is a guaranteed death benefit
- The cash value account or the investment included in this policy grows over time at a guaranteed rate
There are some whole life policies that earn annual dividends. This means that you get a portion of the insurer’s financial surplus, however, dividends are not a guarantee. If your account does get some cash dividends, you can either take it out as your own money, leave them in to earn interest on your account, or you can use them to decrease your payment policy for the month, repay whatever policy loan you have or even purchase additional coverage.
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