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There are many reasons to consider a life insurance policy. Different products are available to suit different needs. Before you start the process learn more about the basics below.
WHAT YOU NEED TO KNOW
Term Life Insurance
Permanent Life Insurance
What is it?
You can think of "Term" Life Insurance as if you are renting coverage. The policies are commonly sold in terms of 10 years, 20 years, or to age 65. The insurance premiums are guaranteed to stay the same for the length of the specified term. Once you reach the end of your term the premiums rise to reflect your new more seasoned age. If you buy a 'Term-20' life insurance policy the premium will change every 20 years.
EXAMPLE: Joe is a 35 year old non smoker. He purchased a Term - 20 policy that has a death benefit of $500,000. If he passes away his beneficiaries will receive $500,000 tax-free. He currently pays $50 a month for this coverage. After 20 years Joe is 55 and alive and well. If he decides to keep the insurance policy his premiums will rise to reflect his new age and the beginning of a new 20 year rental period, or "term".
What Are Some Features?
-Cheap initial premiums that rise as you start new terms
-Can often be converted into permanent policies
-Does not have any cash value or investment component. If you cancel the policy you will receive nothing back
-The death benefit is paid tax free to your beneficiaries
When To Use Term Insurance
Term insurance is a great solution for time specific risks that require coverage on a budget.
For example: A mortgage or a loan that have end dates. In order to make sure your spouse isn't left with the mortgage if something were to happen, you should consider buying coverage for the amount of the mortgage.
Often times mortgage lenders sell "creditor protection life insurance" with their products. This is definitely a type of life insurance you would want to explore other options for. Learn more about that here.
What is it?
You can think of Permanent Life Insurance as if you are buying coverage. Policies are sold with the premiums set in stone from the outset. This means most policies have no risk of becoming more expensive later in life.
It is also very common for these policies to build cash values over time. The most common permanent policies are Whole Life and Universal Life, both of these have an investment component that build equity. This is frequently referred to as a Cash Surrender Value (CSV).
The CSV can be withdrawn and used as you wish, or it will be added to the death benefit for your beneficiaries.
These policies can either be paid up in 10 years, 20 years or the premium is set at a stable level for the entire lifetime of the policy.
EXAMPLE: Jane is a 30 year old non smoker. She has recently purchased a Whole Life policy to be paid up in 20 years with a $200,000 death benefit. It will cost her $500 per month for 20 years. After 20 years the policy is paid up and she no longer needs to pay anything.
If she passes away at anytime her beneficiaries receive $200,000 plus any cash surrender value that has accrued. Jane lives a long healthy life and by the time she is 65 her policy's CSV has grown to approximately $400,000 and by the time she is 85 it has grown to approximately $1,200,000.
*These numbers are based on real policies but are in no way guaranteed.*
What Are Some Features?
-Premiums stay the same over the life of the policy
-Policies can be fully paid up at accelerated periods such as after 10 years, or 20 years.
-Policies include investment components that build Cash Surrender Values over time.
-The death benefits is paid to your beneficiaries tax free. For permanenet policies this is the intial face value plus the CSV at the time of death.
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