Life insurance is a simple answer to a very difficult question: How will my family manage financially when I die? It’s a subject no one really wants to think about. But if someone depends on you financially, it’s one you cannot avoid. There are many types of life insurance, but for all of them the bottom line is the same: They pay cash to your family after you die, allowing loved ones to remain financially secure.
Term life insurance provides protection for a specific period of time—the “term”—and is designed for temporary circumstances. It makes the most sense when your need for coverage will disappear at some point, such as when your children graduate from college or when a debt is paid off.
The most common term policies provide coverage for 20 years, but they can run the gamut from one-year policies to terms of 30 years or even longer. Typically, term insurance offers the greatest amount of coverage for the lowest initial premium and is a good choice for young families on a tight budget.
Permanent insurance offers lifelong protection, and you can accumulate cash value on a tax-deferred basis. This cash account can be used for a variety of purposes, from helping you out of a tight financial spot, to providing funds to take advantage of an opportunity, to supplementing your retirement income. The downside? Initial premiums are considerably higher than what you would pay for a term policy with the same face amount.
Permanent insurance falls into 4 categories: