Life insurance is a financial safety net that protects your family in the event that you die. It provides financial assistance that can be used to pay for a funeral, make ends meet, pay off debt, or even pay for future expenses such as college tuition. It is a tax-free payment that can be used for any purpose following an unanticipated loss. Is it better to get term or permanent life insurance?
One advantage of life insurance over direct inheritance is that most policies are paid out quickly after a death, whereas estates can take longer to process.
There are two types of life insurance, according to the Life and Health Insurance Foundation for Education: term and permanent.
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Life Insurance (Term)
Term life insurance is intended to be only temporary. As the name implies, it provides coverage for a specific period of time, and a term can range from a few years to 30 years, though a 20-year term is more common.
A common application for term life insurance is by parents who purchase a policy that will cover their children until their college tuition is paid for and they are on their own. A term policy may also be used to ensure that a spouse can continue to pay a mortgage or other bills if the other passes away.
One of the primary advantages is that their initial premiums are lower than those of a permanent policy. Some term policies include a conversion option, which means they can be converted to a permanent policy rather than letting the policy lapse when the term expires.
Life Insurance That Is Permanent
A permanent life insurance policy, also known as a whole life policy, protects you for the rest of your life. Although they are initially more expensive than term policies, they provide the advantage of securing coverage when the buyer is younger and healthier. As long as the premiums are paid, the policy remains in effect, even if the owner develops a condition that makes it difficult or prohibitively expensive for them to purchase a policy later in life.
A permanent life insurance policy accumulates cash value because it is intended to last a lifetime, much like a savings account linked to the policy. The idea is that the cash value will grow over time, helping to offset any premium increases. Another advantage is that the cash value can be used to secure a loan.
So, which is superior?
Every situation is unique, and individual policies may differ among the many insurance companies that provide them. Before choosing between term and permanent life insurance, consider the pros and cons of each policy, as well as your current and future financial needs, and consult with a professional.