Life insurance is a means to help your dependents pay for expenses such as funeral costs and future expenses, such as college tuition or home-related payments. Two chief forms of life insurance exist: whole life insurance or term life insurance. The amount of coverage provided varies, as does the length of time the policyholder is covered.
Whole Life
Whole life insurance is also known as life or permanent life insurance. These policies extend through the life of the individual and include a savings component. The longer a person funds the policy, the longer the savings side of it continues to build. For this reason, whole life insurance also is considered an investment because the person funding the policy can withdraw the funds (with some tax penalties) should he need them in case of emergency. However, when you do pass away, the proceeds are typically awarded tax-free to your beneficiary.
Term Life
Term life insurance is for a specific length of time. If you purchase term life insurance, you select coverage for a number of years. For example, you may agree to pay for a 30-year life insurance policy. If you pass away during this time, your beneficiaries will receive benefits in terms of the policy amount. For example, if you purchased a 30-year policy that pays $200,000, your beneficiaries will receive $200,000 if you pass away during this time. However, if you outlive your policy, your beneficiaries will not receive reimbursement at the time of your death.
How Much Do I Need?
Life insurance policies are generally purchased considering a number of factors, including expected funeral costs; future needs of your dependents, such as house payments and college tuition and how much and how long your dependents would require your salary should you no longer be able to provide it. As a general rule, the more dependents you have, the more life insurance you will need in order to support your family.
Cost
Permanent life insurance is generally considered to be more expensive than term life insurance because the policy has a savings component and will be paid out upon a person's death. Conversely, a term life insurance policy is less expensive first because it does not have a savings component and second because the policy may or may not be paid out dependent upon the length of a person's life.
Considerations
While a whole life policy may sound appealing because it has a savings element associated with it, financial advisers caution others to carefully examine the stated benefits and interest rates associated with the policy. Whole life insurance policies rarely earn more than other investments, including stocks, bonds or even a high-interest savings account. The policies also are associated with high commission fees from insurance agents that may de-value the policy. According to Smart Money magazine, commissions and other fees can make up practically 100 percent of a person's first-year contributions to the whole life policy. However, if you will have the policy for a very long time, it is possible that a whole life policy could be the better investment.
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