What Type of Life Insurance Policy Do I Need?
When you have financial obligations that will last over a long period of time, like a mortgage, and you are the main income provider for your family, it's a good idea to purchase life insurance. A life insurance policy protects your loved ones in the event that you die before your debts are paid. Prior to purchasing a life insurance policy, however, you should understand the different types and know what you need.
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Types
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There are two types of life insurance. Permanent life insurance policies offer cash value savings along with a death benefit. Term life insurance is a life insurance policy that does not provide any cash value. Instead, premium payments are made in exchange for the death benefit only.
Significance
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Cash value life insurance builds income as a reserve against the death benefit. This means that part of the premium is invested by the life insurance company to hold down the future rising costs of insurance. In the early years of the policy, most of the premium is invested and not much cash value will accumulate in the policy. However, in later years, the policy cash value may be significant.
Term life insurance provides a premium which can be level or increasing every year. There is no cash value. Instead, the insurance company charges for the pure cost of insurance (on an increasing premium policy called "annual renewable term") or inflates the cost of insurance and invests the excess premium to hold down future costs of insurance, similar to a cash value policy.
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Benefits
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The cash value policy offers an investment component that can be used as a savings. Cash value builds up inside the policy on a tax-free basis and can be withdrawn or borrowed against for any purpose.
Term policies are simple to understand. There is no investment component. Additionally, the premium payments on the term policy are lower than for a cash value policy.
Drawbacks
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Cash value policies come with premiums that are often double, triple or quadruple the cost of term life insurance. Investment performance isn't always as good as what you may achieve outside of the policy.
Term life is temporary insurance. These policies don't last for more than 30 years. When you are ready to renew, the policy usually becomes too expensive to pay for.
Considerations
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Make sure that you know your purpose for buying life insurance. Term life insurance is ideal for insuring a mortgage or other loan. Cash value life insurance is best when you want to insure your financial obligations and have a cash value savings. Cash value insurance also serves as burial insurance in old age, since the policy will remain in force until you die, instead of being set for a number of years only.
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