Life insurance can provide financial protection for the loved ones of the policyholder left behind after their death. Certain types of life insurance are also used as investment strategies. Life insurance, like all insurance, is a contract between the policyholder and the insurance company. The policyholder pays premiums in exchange for the benefits included in the policy, which can include more than just payment to the designated beneficiaries upon the insured’s death.
Term life insurance and permanent life insurance are two primary types of life insurance policies that serve different purposes and offer different benefits. Here's a brief overview of the essential differences between the two:
1. Duration: Term life insurance provides coverage for a specified period, typically ranging from one to thirty years. Once the term expires, the policyholder may need to renew the policy, purchase a new one or let the coverage lapse. In contrast, permanent life insurance offers coverage for the duration of the policyholder's life, as long as the policy remains in force and premiums are paid.
2. Premiums: Term life insurance generally has lower premiums than permanent life insurance. This is because term life insurance is designed to provide temporary coverage and has no cash value component. Permanent life insurance, on the other hand, builds cash value over time and may have higher premiums to account for this.
3. Cash value: Permanent life insurance policies build cash value over time, which can be borrowed against or used to pay premiums. In contrast, term life insurance policies have no cash value component.
4. Coverage amount: Term life insurance policies typically offer higher coverage amounts at lower premiums than permanent life insurance policies. This makes term life insurance a popular choice for those who want to ensure their beneficiaries have enough financial support in case of an unexpected death.
The premiums will depend on various factors, including the policyholder's age, health, occupation, tobacco use, and other lifestyle habits. Some policies may require a medical exam or health information before issuing coverage.
The primary purpose of term life insurance is to provide financial security and support for the policyholder's beneficiaries in the event of their death. The death benefit can be used to pay for final expenses, such as funeral costs, outstanding debts, ongoing living expenses, and future financial needs. Whole or Universal Life insurance is used for estate planning and investment purposes, such as providing liquidity to pay estate taxes or to leave a legacy for heirs.
Overall, life insurance is important for anyone who wants to ensure their loved ones are financially protected upon death. Reviewing and comparing coverage options is necessary to determine the type of life insurance and the face amount of coverage that best meets your needs and budget.