It is often hard for people to think about life insurance, but it is an important step in securing your family’s financial future. Once you start looking at the different life insurance options, you may quickly get lost and wonder which option is right for you. Each situation is unique and it is important to do your homework and decide which option makes the most sense for you and your circumstances. Providing life insurance for your family provides a safety net if anything should happen to you. While we would rather not think about what could happen or tragedies that may occur, providing life insurance for the unknowns in life is an essential step in financial planning for the future.
There are two main kinds of life insurance: Term and Whole Life insurance. Term life insurance is what is sounds like, the insurance is good for a certain amount of time or the term of the life insurance policy. Whole life insurance is designed to last your entire life, no matter when you die, and builds a cash value in the meantime. Deciding which type of life insurance is right for you depends on your budget and what your goals are in purchasing life insurance.
Term Life insurance:
Term life insurance is the cheapest of the life insurance options and the easiest to understand. The price of the term life insurance policy is based on your age, health, and the term, or length, of the policy. Most term life insurance policies are for ten, twenty, or thirty years. Your insurance policy will be good for the term, or period of time, that you choose to purchase. Term insurance is designed to pay out if you die prematurely and will protect your dependants. If you die during the term of your insurance policy, then your dependents will receive a payout for the amount of money that your insurance policy states. Other than a payout in the event of your death, there is no value to the insurance policy. For most policies, the payout and payments on the policy will remain the same throughout the term of the policy.
When determining the length of time that you are in need of, decide how long your dependants will rely on you for financial support. You want your term coverage to cover any bills that may arise and care for your dependents if you were to die early. How much money will your family need, if you are no longer there to provide for them? The payout will need to replace your income and help pay for bills and services that you now provide. The term of the policy should last as long as your family will need financial support from you. Once your dependants are on their own, your home is paid off, and you have very healthy savings, the need for term insurance goes away, and hopefully, the end of your term insurance will coincide with these circumstances. Once you know how much you will need to be covered for and for how long, you can easily shop for insurance rates, as there are many insurance companies that sell term life insurance at an affordable cost. Term life insurance is the cheapest and most economical form of life insurance available, so it is great for most budgets and circumstances.
Whole Life Insurance
Whole life insurance provides insurance coverage for your entire life. It also includes and investment portion that is also known as the cash value of the policy. As the policy matures, the cash value grows slowly and is tax deferred. Tax deferred means that you will not pay taxes on the gains, or the money you make on the investment, while it is in the insurance policy. You may be able to borrow money against the insurance policy or sell it for the cash value. If the loans against the policy are not paid with interest, the death benefit will be reduced. If you sell the policy, you lose any coverage that the policy provided.
The premiums remain the same for as long as you live with a whole life policy. The death benefit of the policy is guaranteed. The cash value that the account slowly creates is guaranteed to grow at a certain rate of return. Some policies may even earn annual dividends. Those dividends can be taken out in cash, left in the policy to earn interest, decrease the premium that you pay, repay any loans against the policy, or to add additional coverage to your policy. Dividends are not guaranteed like the cash value is. Whole life insurance is considerably more expensive than term insurance because it lasts your entire life, there is a cash value associated with the policy, and you receive a guaranteed rate of return on your investment.