Life insurance is a type of financial product that provides a payment (a death benefit) to the beneficiaries of the policyholder upon their death. It is designed to offer financial protection to the surviving family members or dependents in the event of the policyholder’s death.
There are two main types of life insurance:
1. Term Life Insurance
- Duration: Provides coverage for a specific term, such as 10, 20, or 30 years.
- Benefit: Pays a death benefit if the policyholder dies within the term.
- Cost: Generally more affordable than whole life insurance because it only covers death during the term and has no cash value.
- Renewability: Some policies are renewable or convertible to a permanent life policy, but premiums may increase over time.
2. Permanent Life Insurance (Whole Life, Universal Life, etc.)
- Duration: Coverage lasts for the lifetime of the policyholder, as long as premiums are paid.
- Benefit: Pays a death benefit regardless of when the policyholder dies.
- Cash Value: In addition to providing a death benefit, these policies accumulate cash value over time, which the policyholder can borrow against or withdraw.
- Cost: More expensive than term life insurance because it provides lifelong coverage and includes a savings or investment component.
Key Factors in Choosing Life Insurance:
- Coverage Amount: The sum of money your beneficiaries will receive.
- Premiums: The amount you pay periodically (monthly, quarterly, or annually) to maintain the policy.
- Policy Riders: Additional features you can add to your policy, such as accelerated death benefits, disability riders, or critical illness riders.
Common Uses of Life Insurance:
- Income Replacement: To replace lost income for dependents.
- Debt Repayment: To cover mortgages, loans, or other debts.
- Funeral Expenses: To help cover funeral and burial costs.
- Estate Planning: To help with estate taxes and other financial matters for heirs.
- Savings or Investment: With permanent life insurance, the cash value component can serve as an investment tool.
If you’re considering life insurance, it’s important to assess your financial needs, the future needs of your beneficiaries, and what type of policy fits your budget and goals.
