The Average Life Insurance Policy
Life insurance policies are financial products designed and sold by life insurance companies. They are designed to protect your family in the event of your death. If you die before you pay off all of your financial obligations, you leave your family with your debts. You could potentially bankrupt your family. Understanding how average life insurance policies work is the first step to protecting your family.
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Types
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Two kinds of life insurance policies are available for purchase. The most basic is term life insurance. The other type is permanent life insurance. This type of life insurance is also referred to as "cash value" life insurance.
Function
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Term life insurance provides a death benefit for a fixed or variable premium. The variable premium term life is called annual renewable term life insurance. This type of life insurance collects just enough premium to pay for the cost of the death benefit. Because of this, the premium amount increases every year on a guaranteed basis. Permanent life insurance offers premium payments that are level for the life of the policy and the policy builds a cash reserve called a cash value.
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Benefits
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The benefit of a cash value life insurance policy is that you receive a cash value savings that can be used for any purpose. The savings grows tax-deferred while inside the policy and can be withdrawn or borrowed against tax-free. The benefit of a term life policy is that it offers low-cost death benefits for you and your family.
Drawbacks
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The drawback to a cash value policy is that the premiums are several times the cost of a term policy. Cash values may not be guaranteed depending on the type of permanent policy you buy. However, term life insurance only lasts for a set period of time. Term policies do not extend beyond 30 years. This would be a disadvantage if you need life insurance in your old age at a time when life insurance is prohibitively expensive.
Considerations
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Consider whether you want a term policy that gives you affordable, temporary life insurance protection or you need a long-term, permanent insurance solution. For example, temporary insurance is ideal for insuring mortgages, while permanent insurance is ideal for providing a death benefit and a cash savings.
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