Life insurance is generally a long-term commitment. Before buying any policy, clarify what you are trying to accomplish. While financial protection of loved ones is the primary reason for purchasing life insurance, you may have other objectives that would be satisfied with the right life insurance plan. Are you accumulating funds for education costs? To pay estate taxes? Are you trying to build supplemental income for
retirement or emergencies?
What Are My Options?
Several types of life insurance are available to meet your needs. There are two main categories of life insurance: permanent insurance and term insurance. The difference between the two is like the difference between owning and renting a home. Buying permanent life insurance is like owning a home; buying term insurance is like renting one. Each has its advantages and disadvantages.
Like owning property, owning permanent life insurance is often an appropriate way for people to meet long-term needs. Over time, permanent life insurance builds in value. In contrast, purchasing term insurance, like renting property, is usually appropriate for meeting short-term or temporary needs. Term policies build no cash value.
Term life insurance offers protection for your loved ones for a specified period of time—usually from one to 20 years. If you stop paying premiums, the insurance stops. Term policies pay benefits if you die during the period covered by the policy; but they do not build cash value. Term life insurance may be appropriate for short-range needs. A breadwinner might, for example, buy a term policy that matches the length of a home’s mortgage. Premiums for term insurance are often higher as you get older.
Permanent insurance policies or whole life insurance do not expire; they are intended to protect your loved ones permanently. These policies accumulate cash value, although they should not be purchased solely for that use, since their primary purpose is to provide protection. Whole life insurance premiums do not change over time. Other benefits of whole or permanent life insurance are that the cash value accumulation is tax-deferred and you can borrow or withdraw money against the accumulated cash value. Additionally, many companies pay policyholders an annual dividend. Dividends are not, however, guaranteed.
Permanent life insurance policies have variations. Your insurance agent can provide you with specific details to help you choose the policy that best serves your needs.
