Life insurance can help cushion the financial impact on your loved ones in the event of your death.
A life insurance policy provides a tax-free, lump sum payment that can help protect your family’s lifestyle in the absence of your earning power. Your family can use the insurance proceeds to help replace lost income, eliminate debt, pay for college, keep a business afloat, or address other financial needs and goals while they adjust to a new life.
The two major categories of life insurance products are Term and Permanent.
Term Life Insurance
Term life insurance is pure insurance protection that pays a death benefit if the insured dies during a specified period of time. All premiums paid are used to cover the cost of insurance protection.
The term may be one, five, 10, 20 or 30 years. The insurance coverage ends when the term of the policy expires. The policy can usually be renewed but the premium will likely increase on renewal. Since this is temporary insurance coverage it is the least expensive to acquire.
Here are the main features of term life insurance:
- Temporary insurance protection
- Low cost
- No cash value
- Usually renewable
- Sometimes convertible to permanent life insurance
Permanent Life Insurance
Permanent life insurance provides lifetime insurance protection and does not expire like term insurance. Most permanent policies offer a savings or investment component combined with the insurance coverage. This component, in turn, causes premiums to be higher than those of term insurance. The investment may offer a fixed interest rate or may be in the form of money market securities, bonds or mutual funds. This savings portion of the policy allows the policy owner to build a cash value within the policy which can be borrowed or distributed at some time in the future.
Here are the main features of permanent life insurance:
- Permanent insurance protection
- More expensive to own
- Builds cash value
- Loans are permitted against the policy
- Favorable tax treatment of policy earnings
- Level premiums
Whole, universal, variable and single-premium are all types of permanent life insurance. Each may be used for wealth accumulation, protection, distribution and transfer depending on your needs.