If you are young, chances are that the subject of life insurance has probably never even crossed your mind. Nevertheless, dying is as much a part of life as having kids or working for a living, and as people become older, having a life insurance policy makes more and more sense.
Life Insurance — Do You Really Need It?
If you are independently wealthy or have spent your life making sound investments and can provide an income for your dependents through them after your demise, you probably do not really need life insurance. If on the other hand, you have a family and are their main source of income, or the assets you own don’t cover your debts, life insurance can be a sound investment.
A life insurance policy could mean the difference between your family struggling for an income or receiving an income from your estate and having all of your debts paid off in the event of your demise.
Insurance companies offer two principal types of life insurance policies, term and permanent or “cash value” insurance. We will examine the two types of policies to determine which type of policy would best suit your needs.
Term Life Insurance
Term insurance consists of a policy which will pay out a specified amount of money if you die within a certain “term”, which could be 10, 20 or even 30 years. This type of insurance will not accrue cash while you are alive and is designed to give your dependants financial support until the mortgage on your house is paid off so you can then depend on your assets and other investments to be self insured.
An important feature of term insurance is that it can often be renewed or converted to a permanent policy. Many insurers will allow the client to renew their policy without a new medical examination and often offer the policyholder the option of converting to a permanent policy for a higher premium.
Switching to a permanent policy makes sense if you have reached the age of 65 and not yet acquired sufficient assets to self insure, otherwise, most people stick to term life insurance.
Permanent Life Insurance
Also known as “cash value” insurance, these policies command much higher premiums than term insurance. This is because the additional premium amount accrues as savings and interest over the life of the policy.
Higher premiums on permanent policies make for higher commissions for insurance dealers. This is one of the reasons why permanent policies seem to be so heavily promoted in the insurance world. Nevertheless, these types of policies can have some disadvantages relative to term policies.
Aside from paying higher premiums, another disadvantage is that you have no say in the investment account portion of the policy. Also, if you want to cancel your policy and withdraw your money, you may be charged a large penalty.
Generally, term insurance fits most people’s needs, although permanent insurance makes sense if your family needs to pay estate taxes and/or you have dependents at the time of your death and have insufficient funds to provide for them.
Every person’s situation is different, so knowing the particulars of both types of insurance policies will give you a good idea as to what would be optimal for your situation. Once you have thoroughly determined your needs, you can then shop around for the best value policy.