Life insurance, something people rarely want to talk about, helps protect the financial future of those you leave behind. If you were to die today would your family have enough money to pay off the mortgage? Would your spouse have enough money to send your children to college? You must keep these questions in mind when shopping for life insurance. Insurance agents generally focus on two types of life insurance, term life and whole life; both have their advantages and disadvantages.
Definitions
Term life insurance provides protection for a limited number of years; if the insured lives past the stipulated time period the policy pays nothing. Whole life insurance, a continuous policy that does not have a stipulated time period, pays out regardless of when the insured dies.
Premiums
Term life insurance, because it is scheduled to end, is less expensive than whole life insurance. With level term life insurance, the premium and the death benefit never change; with annual term life insurance, the death benefit remains the same and the premium increases annually; and with decreasing term,often known as mortgage insurance, the premium remains the same but the death benefit decreases. With a whole life policy, the premium remains the same throughout the policy period.
Uses
People purchase term life insurance when they need a large amount of insurance for a small amount of premium. They also purchase term life insurance to protect their future insurability. The death benefits of a term life policy are often used to pay off a mortgage or existing loans. Whole life insurance, a type of permanent life insurance, will not cancel and provides a cash value that you can borrow against at a future date. Often, the death benefits paid on a whole life policy used to create an estate for the beneficiaries or to pay estate, death, taxes.
Advantages
Term life insurance, generally cheaper and easier for the buyer to understand, may also be renewed, to a certain age, or converted to a permanent life policy without proving insurability. This is especially important if the insured has developed any medical issues that have made him uninsurable. Whole life policies are not designed to cancel after a stipulated time period. They will pay out regardless of when the insured dies, and the annual premium, guaranteed to stay the same, does not increase. The policy also builds up a cash value that the insured may borrow against.
Disadvantages
Term life insurance, designed to end before death, does not build up a cash value. Whole life insurance is more expensive and the cash value built up within the policy is not paid in addition to the death benefit.
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