Life insurance is an investment in protecting your family’s financial security. It is a contract between you and an insurance company where you pay premiums, and the company pays a lump sum death benefit to the person you nominate as a beneficiary.
Once they receive the money, it can be used to pay bills, mortgage, or put kids through college. It’s a financial safety net that can help you protect your family and provide for them even when you’re not around.
Let’s look at the primary types of life insurance.
Term Life Insurance
This is the most affordable type of life insurance and consequently also the most popular type of life insurance bought by people. Term life insurance offers coverage for a limited amount of time, and the premiums payments stay the same throughout the duration of the policy term. The usual policy lengths or terms are 10, 15, 20, 25, or 30 years. If you happen to pass away during the term of your policy, your beneficiaries can claim the tax-free death benefit. In case the policy expires, you may be able to renew its coverage in one-year increments. Still, each year’s renewal will cost more.
Permanent Life Insurance
This life insurance offers coverage for the entire duration of your life. It’s more expensive than term life insurance and usually builds cash value. The cash value component of the policy accumulates on a tax-deferred basis and acts as savings. You may even borrow or make a withdrawal against the policy’s cash value. If you surrender or cancel the policy, you will receive the cash value minus the surrender charge. There are four types of permanent life insurance. The first, whole life insurance, offers a fixed death benefit and cash value component that grows at a guaranteed rate. Universal life insurance provides more flexibility and allows alteration of premiums and death benefit within limits. It often has investment subaccounts that you can select and manage. The third, burial insurance, is a small whole life policy with a small death benefit and is designed to cover funeral costs and final expenses. The final, survivorship life insurance, covers two people under one policy and pays the death benefit when both have passed.
