Life insurance can be confusing and complicated and many people don't understand what type of policy they need. There are two main types of life insurance – term and whole life. A universal policy is another type of whole life policy that is also available, but this article will deal with the differences and uses of term and whole life policies. There are different reasons to purchase either of these two types of life insurance, and it is important to know what these reasons are and what type of policy or policies that you might need.
First of all, term insurance is the least complicated of the two. It has a specified amount of death benefit for a specific amount of time. It can be for five years, ten years, or even twenty years, but it is important to remember that the older you are when you purchase it, the more expensive the term insurance will be. It is also important to know that if any health issues arise that both term and whole life policies may not be issued, or may be issued at higher rates. However, it is always cheaper than what a whole life insurance policy will cost for the same amount of death benefit.
A whole life policy insures a person for the duration of their life. As long as the premiums are paid, the insured will be protected for the rest of their life. Whole life policies also build up a cash value that the insured can borrow against if they wish to. A whole life policy will be more expensive than a term life because of the fact that it guarantees coverage of the insured no matter what health issues arise after the policy goes into effect, and because the owner has the ability to borrow money against the policy. This money can be paid back, or it can be kept and the balance can be deducted from the current death benefit. For example, if a policy has a death benefit of $10,000 and the owner borrowed $2,000, the owner can repay the $2,000 and restore the death benefit to $10,000, or he can simply keep the loan, not repay it, and the death benefit would then be $8,000 rather than $10,000.
Many companies offer life insurance through their benefit programs. While this is a great thing to take advantage of, it is also worth noting that most life insurance offered through a job will be a term insurance. If the company ever goes under, or if the employee ever leaves the job, then the insurance will also be cancelled. This is an important thing to consider for those in professions or situations where changing companies often may be beneficial. It may be smart for them to also keep a separate insurance outside of their job to make sure they are covered in case they leave the company, or are not covered under a new benefit program.
It is also important to know what your insurance is for. You should add up all of your debt – mortgages, car payments, credit card debt, student loans, and any other debt you might have. You should have at least this much coverage for your life insurance so that you don't leave your loved ones with the responsibility of paying them off for you. You should also check in your area and find out how much an average funeral and related expenses are and add this into your total. They usually run around 8 to 15 thousand dollars, but considering what you want and where you live it may be a little more or a little less.
If it's affordable for you, you may want to consider some other additions to your insurance. One may be to add up your probate taxes and to add that into your insurance. Life insurance goes around probate, therefore your beneficiary will receive it before your estate will come out of probate. Check to find out how much estate taxes are in your state and estimate your probate taxes and add them to your insurance. Also, leaving gifts to friends, family, companies, or charitable institutions is also a common use of insurance.
If you are healthy and don't have a lot of major diseases that runs in your family (diabetes being one health issue that can pose problems for those who seek insurance) it may be in your best interest to buy more term life than whole life policies while you are young. It will be cheaper, and when you are young you usually don't make as much money as when you settle into a career. However, at least a minimal amount in a whole life policy is recommended in case a disease is diagnosed and you wouldn't otherwise be eligible to be insured. Even if you are diagnosed with a disease you will know that when your term life policies come to an end you will still be insured for the amount that you have invested in a whole life policy. If heart conditions, diabetes, or other degenerative diseases run in your family, it may be in your best interest to invest more in whole life policies as soon as possible. This will keep your costs of insurance lower in the long run.
Combinations of whole life and term life can be very beneficial, and it is always important to have individual policies for couples. If a spouse is insured through a rider on the other spouse's policy, it may be terminated with the passing of the other spouse, leaving them to find new insurance at an older age, or with more health complications than when the policy was started. Insuring children is also a good idea. Getting a whole life insurance policy for a child will ensure that they will have a policy at a great price, and it is smart if there are health issues that run in the family. It is also smart to buy term insurance to cover expenses which are not permanent such as mortgages, car payments, or even to set up a college fund for a child or grandchild.
Term and whole life policies are both very beneficial to the family of the policyholder because the benefit is paid out quickly and is tax free. It is important to have some coverage even if you cannot afford the amount that is truly necessary to cover your final expenses and debt. It is also important to talk to an agent to find out the best way to set up your life insurance policies.