Life insurance is a form of financial protection that can help you achieve your goals. There are three basic types of life insurance: term, whole and universal. These policies differ in the amount of coverage they provide, as well as how long the coverage lasts and at what point it no longer pays out.
Term Life Insurance
Term life insurance is a contract that specifies that, in exchange for a premium, the life insurance company promises to pay a death benefit if the life insured dies within the fixed term of the contract. The “term” is the period of time during which the coverage is guaranteed to remain in place, as long as the policy’s premiums are paid.
The most common terms for term life insurance policies are 10, 20 or 30 years. Some policies offer longer or shorter terms, but these are less common.
As long as you keep your policy current and keep paying your premiums on time (sometimes even if not on time), your family will receive the full death benefit amount when you die during this period. If you pass away before or after this period expires, your beneficiary will receive nothing from your term life insurance policy.
When Should You Buy Term Life Insurance?
Term life insurance makes sense for many people who need protection for a specific amount of time—for example:
- When buying a home with less than 20% down payment
- When starting a business that won’t make money yet
Whole Life Insurance
Whole life insurance policies are similar to term life insurance except that it build up a cash value (which is also called a guaranteed death benefit) and is payable upon cancellation or maturity of the policy. These policies can be used to fund retirement plans and provide a steady stream of income during retirement.
While this type of insurance provides protection against premature death where there is no maturity date and can provide valuable tax advantages because premiums are deductible from income taxes when paid by an employer or employee (as opposed to term life insurance which has no tax advantages), it also comes with higher premiums than term life insurance due to its longer duration and higher administrative costs associated with managing an investment portfolio which is typically invested in stocks, bonds and mutual funds that fluctuate in value over time
Universal Life Insurance
Universal life insurance is a type of permanent insurance which provides coverage for the entire lifetime of the life insured, but also includes a savings component that is created through the deposit of excess premiums. Within certain limits, the policyholder can use a UL insurance policy to accumulate savings that are completely sheltered from tax if they form part of the death benefit, or tax-deferred if they are withdrawn prior to death.
These policies are noted for their flexibility, allowing owners to make changes to the face amount and premium payment frequency at any time. The policyholder is also able to take withdrawals at any time without affecting their coverage.
The main difference between universal and whole life insurance is that universal life insurance has an investment component while whole life does not. Universal policies allow you access your money in two ways: by withdrawing it as cash or taking out a loan against it. You can also choose how much you want to pay into your policy each month or year depending on your financial needs at that time.
Before you can decide on a type of life insurance, try to determine your financial goals. For example, if you have children or want to help provide for your family after you’re gone, then term or whole life insurance would be the best option. On the other hand, if you’re looking to continue paying off additional debts or leave something behind for charitable causes, then choose universal life insurance. No matter what you decide, it’s important to have a sound financial plan in place so that you can achieve your financial goals through the use of life insurance.
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