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Life Insurance
The primary purpose of life insurance is family financial protection in the event of the death of a family member. If you do not need to protect someone else, you do not need life insurance. Do not buy any life insurance policy unless you fully understand why you need it and how it works.
Life insurance is often sold with a lot of charts, graphs and other visual aides that can be confusing. In fact, life insurance is quite simple. The basic premise is that because we all die, and, our life expectancies as a group are very predictable, there is a guaranteed claim on each policy. Different policies are offered in which you may pay now or pay later to build up the promised claim fund.
There are three primary types of life insurance policies: term, whole life and universal life.
Term Life
Term life insurance covers you for a finite period of time such as 10, 20 or 30 years. It is the least costly of the plans because the death benefit will be paid only if you die within the term covered in the contract. It is ideal for families with restricted budgets who need high limits of coverage but have few dollars to spend. You will pay less now; however, if you need to extend coverage beyond the initial term period, your cost will significantly increase and you will probably have to prove your medical insurability again. Most term policies also include the option to convert your policy to permanent insurance within the initial term period.
Whole Life
In the short run, whole life insurance is the most expensive coverage. Unlike term insurance, it is permanent coverage with fixed premiums. Permanent insurance combines the security of death benefit protection with the ability to build cash value. The cash value can be accessed through loans or withdrawals, if needed, during the insured's lifetime. It can even become a supplemental retirement plan if the need for the insurance is reduced in later years.
Universal Life
Universal life is also permanent insurance which provides death benefit protection, the potential to build cash value on a tax deferred basis and the ability to adjust premiums depending on the policy. Unlike the earlier versions of universal life, you can now create a Guaranteed Universal Life contract, so that your costs and benefits can be locked-in, regardless of the carrier's experience or the interest rate environment.
