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Types of Life Insurance

Scanning the multitude of life insurance products on the market can be a daunting process, especially when you are trying to settle on the one that will best serve the needs of you and your loved ones. There are two basic types of life insurance, term and permanent policies, which make the review process that much simpler.

Before purchasing a specific kind of life insurance cover, you will need to take a number of factors into consideration:

  • age
  • marital status
  • children and their ages
  • medical history
  • earning capability and debt ratio
  • anticipated financial needs in the future
When is Life Insurance Needed?

When determining whether or not you require life insurance, every person’s individual circumstances need to be evaluated. If you are married, have dependents in the form of children or other relatives, own a business or substantial property, or have considerable financial obligations, you are definitely in a position to take out life insurance. This is the only way to guarantee that your family isn’t left financially stranded.

The major bonus about a life insurance policy is that the benefits go directly to those you left behind, and aren’t first subjected to a series of roadblocks – like the funds from an estate often are. The underlying purpose is ultimately to avoid handing down a large financial burden to your family and other beneficiaries.

Term Life Insurance

As the simplest and least expensive type of life insurance available, term life only has one function: to pay a pre-decided lump sum to the designated persons upon your death. The policy protects your family by providing money that they can invest and use to cover any final expenses incurred by your death.

With this scheme no cash value account is involved, only straightforward insurance. The other handy part of this policy is that you are only required to pay for what you need, when you need it – for example, you only pay for coverage until your children finish college.

Permanent Life Insurance

Of the many types of life insurance, this is an umbrella term for policies that combine a death benefit with a savings portion. This latter portion can build up a cash value over time, which the policy owner can then use -either to borrow funds, or to withdraw the cash value to help meet future goals or payments.

The perk about permanent life insurance is that it is subject to favorable tax treatment. Since the growth of cash value is typically on a tax-deferred basis, you are not required to pay tax on any earnings in the policy for the entire duration that the policy remains active. The two main categories of permanent life insurance are whole and universal insurance plans.

To Sum Up

Term insurance is merely straightforward life insurance, while permanent (“cash value” or “whole life”) policies include an additional savings component. The other fundamental difference between the two is that term life insurance expires at some point, while permanent life insurance does not.

Ultimately, the decision in choosing the appropriate insurance plan will be subject to your individual financial standing, age, health, familial ties, and various other factors. For example, a term life policy would be well-suited to a young family who has some investments but isn’t necessarily financially stable – the policy would help to protect those investments and the family members. On the contrary, if you are financially secure and hold considerable investments, the permanent route would be more beneficial in the long run.