How does term life insurance work?
Term life insurance typically lasts for 10, 20, or 30 years, depending on how long you want coverage. If you die while your policy is still active, then your beneficiary receives the death benefit payout. Since it lasts for a set period of time, term life is more affordable than permanent life insurance but still offers similar payout amounts.
Term life can also be purchased to supplement permanent life insurance during certain life events, such as buying a home. If something were to happen to you, your family could pay off the mortgage with the death benefit from your term policy, leaving the payout from your permanent policy for other expenses.
When to consider term life insurance
Term life is a good way to ensure your family will have enough money to cover large expenses, such as a mortgage or a child's tuition, if you were to die unexpectedly. For example, you could take out a 20-year term life policy while your kids are young, giving your family financial security until the kids grow up and move out of the house.
Term life is also a common choice for individuals that have taken on added debt. For example, someone who has just purchased a home might take an additional term life policy to cover the cost of the house until it is paid off. A permanent life policy alone might not be enough to pay for the home and any final expenses.
How does permanent life insurance work?
Permanent life insurance provides lifelong coverage as long as you pay your premiums. No matter when you die, your beneficiary will receive the death benefit payout. The primary kinds of permanent life insurance are:
- Whole life insurance: This type of policy lasts for the lifetime of the insured party. It pays a death benefit but also has a savings component that lets cash value build, which allows you to take out a loan against your payout amount.
- Universal life insurance: This type of policy offers you the flexibility to change your death benefit and adjust your monthly premiums. Like whole life, universal life can also build cash value that you can borrow against.
Important note: If you withdraw or borrow against your policy's cash value without repaying it, you will reduce the cash value and death benefit of your policy.
When to consider permanent life insurance
Permanent life insurance is often selected at an early age with the intent of covering final expenses and leaving an inheritance to loved ones. Many people choose permanent life insurance to ensure their funeral costs are covered, as well as to gain more financial flexibility through the added cash value benefit. On a side note, final expense insurance can be an affordable alternative for covering your funeral costs.
In addition to the added cash benefit, whole life insurance offers set premium rates and lasts for your entire life, so you won't have to worry about higher policy rates down the road. The same goes for a universal life policy, except you can actually change your premium payment.