Life insurance is a means of ensuring that your dependents will have enough funds to cover expenses, such as funeral costs or college tuition, should you pass away. There are two chief types of life insurance (and many subdivisions of the two types): term life insurance and whole life insurance, which is a policy that lasts the length of a person's life and also has a savings component. While it is best to speak to an insurance professional as to what policy is best for your circumstances, there are several considerations to make when evaluating term life insurance.
Basics
At its most basic level, term life insurance is a life insurance policy purchased for a specific length of time, anywhere up to 30 years. If a person passes away during this period of time, her beneficiaries receive the insurance payment of the agreed upon amount. However, if a person does not pass away during the policy's duration, she can either renew the policy or allow the coverage to run out.
Differences From Whole Life
A term life policy differs from a whole life policy for several factors, including length of time and monetary accumulation. A whole life policy lasts until the policy owner turns 100 or when a person passes away, unlike a term life policy that is for a designated amount of time. The second chief difference is that a whole life policy has a savings component to it, meaning a person actually earns money on the policy over time, unlike a term life policy where the returns do not exceed the agreed-upon benefits. However, a whole life policy also tends to be significantly more costly than a term life policy.
Coverage Amount
While your decision concerning life insurance may be determined by a variety of factors, you should obtain enough coverage to provide for the following: funeral expenses, mortgage or college expenses for your dependents and other expenses necessary to care for your dependents. As a general rule, the more coverage you receive, the more money you will pay for your monthly expenses.
Tax Considerations
If you pass away, your beneficiaries will receive the agreed upon sum from your life insurance policy. As long as the policy was in force at the time of your death and there are no other stipulations surrounding your policy, your dependent(s) should receive the benefits from your policy tax-free.
Policy Renewal
If you outlive your policy, you should be able to renew it up to when you reach age 95 or age 80 if you live in New York. However, renewing your life insurance policy is often significantly more expensive than the initial costs for your policy. For this reason, many insurance companies do not offer life insurance policies until a person is age 65 or older.
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