As you consider the wide range of life insurance products that are available, you may wonder what type of policy is best for you now, and how you should plan for the future. A good way to start is to ask yourself why you are buying life insurance, and how will it satisfy your personal and family financial security requirements. Do you want insurance to cover a mortgage? A college education? A business investment? Your retirement? An inheritance for your children? Once you answer these questions, look at the 3 basic types of coverage, whole life, universal life, and term life in order to determine which best suits you and your family’s needs.
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Whole Life This coverage typically remains in force for your lifetime as long as premiums are paid. You pay the same premiums every year. The premiums are initially higher than what you would pay for the same amount of term life insurance. However, they are less than the premiums you would eventually pay if you were to continue renewing that same term policy beyond its designated term.
An important feature of any type of cash value life insurance policy is its ability to build a sum of money inside the policy over its lifetime. You have access to this cash value and can generally either take it as cash or borrow against it. The amount of the cash value depends on the kind of policy you have, premiums you are paying into it, and how long you have owned it.
Policy surrenders and loans incur charges and/or interest. They can also affect policy values and the death benefit.
Universal Life This coverage is designed to be a permanent policy. It is different from traditional policies in that it allows the policy owner to vary the amount and timing of premium payments (subject to satisfying policy premium minimums to maintain the policy), and increase or decrease the death benefit (subject to underwriting for an increase). Cash values accumulate based on premium payments and current interest rates that the carrier is offering.
Term Life This coverage provides financial protection for a limited, specified period of time and is the least expensive form of life insurance coverage. A term policy is most cost-effective when purchased at a younger age. The death benefit face value is paid only if the insured dies within the specified term. Term insurance has no cash value. Many carriers offer term insurance with the option to convert it to a permanent policy.