What Is Life Insurance?
It provides financial protection for the family and potentially friends who you care about. You pay a monthly or annual premium to an insurance company, and in exchange, the company pays a tax-free lump sum of money to your beneficiary or beneficiaries if you pass away while the policy is still active.
One of the benefits of a life insurance policy is you can customize it to fit your family’s needs by choosing the type of policy you buy, the number of years you want it to last and the amount of money paid out.
What Kind of Life Insurance Policies Are There?
There are three commonly known and procured life insurance policies: (1) Term Life Insurance; (2) Whole Life Insurance; and (3) Universal Life Insurance:
Term Life Insurance:
This is one of the most popular types of life insurance as it is straightforward, affordable and lasts as long as you need – since you get to choose the length of the term. Premiums can be paid monthly or annually and in exchange for relatively low rates, your beneficiaries get a large lump sum of money after you pass away.
- How Does Term Life Insurance Work?
Unlike whole life insurance, which lasts for the rest of your life and comes with a cash value, term life is easy to manage and cost-effective. Terms usually last between ten (10) and forty (40) years, after which you can renew your policy, convert it to permanent coverage or let the policy expire. You can choose your term length and coverage amount so you do not have to pay for more financial protection than you require.
Whole Life Insurance:
As the name suggests, whole life insurance last your entire life. As long as you pay the premiums, your beneficiaries will be taken care of when you pass away. Plus, your policy will grow tax-free over time. This type of whole life insurance is more applicable to high earning individuals and families as well as individuals with long-term financial obligations.
- How Does Whole Life Insurance Work?
A whole life insurance policy has two separate parts: the death benefit and the cash value. The cash value accrues interest over time and can be accessed while you are living through a withdrawal or policy loan, though sometimes with a penalty added one. While it will not grow as quickly as dollars in the market could, it can be a steadier, tax-deferred growth account which you can withdraw from.
Universal Life Insurance
It is a type of permanent life insurance. With a universal life insurance policy, the insured person is covered for the duration of their life as long as they fulfill any requirements on their policy to maintain coverage. Similar too many permanent life policies, universal life insurance combines a savings component (called “cash value”) with lifelong protection. When you pass away, the policy’s death benefit is paid out to your beneficiaries.
What is the Difference between Universal Life Insurance and Whole Life Insurance?
While both are a type of permanent life insurance, with a universal life insurance policy, you can adjust your premiums and death benefit over time to suit your needs. With a whole life insurance policy, the premiums and death benefit are fixed for the duration of the policy.