Simply Defined: What is Life Insurance?

Few things in life are certain except for its finite nature. Because of this single, universal element, life insurance is a necessity for most people. While the need is clear, the concept itself isn’t quite so straightforward. Understanding the finer points of life insurance will help you chose the right type of policy for you and your family.

What is Life Insurance?

By definition, life insurance is coverage that pays out a sum of money either after a specific period of time or upon the death of a policyholder. Though this sounds simple enough, plenty of other details factor into the equation. 

Two distinct types of life insurance are available: term and permanent. For the most part, policies referred to in the first half of the definition fall into the category of term life insurance. Coverage providers define whole life insurance as a permanent policy designed to pay out a sum of money when the insured person passes away.

Digging Deeper

With term life insurance, you’ll pay a set premium each month, or quarter as the case may be, for a specified number of years. In general, policies are available in terms lasting anywhere from five years to 30 with five-year increments in between. 

During the term you choose, as long as you pay your premiums as agreed upon, you’ll be covered by the policy. This means it will pay out a death benefit to your beneficiary in the event you pass away before the term ends. If you outlive the policy term, though, you won’t get a cash payout. 

Whole life insurance, on the other hand, is designed to last from the moment you purchase the policy until the time of your death. It doesn’t end after a specific number of years, and it can be cashed out prior to your death if you find yourself up against financial hardships or other needs. With most policies of this type, premiums remain fixed for the duration, so sudden, unexpected increases aren’t an issue.

Exploring the Benefits and Disadvantages of Whole and Term Policies

Both types of coverage have advantages and drawbacks. Term life insurance is typically less expensive in a short-term sense. In turn, it’ll help your dependents cover monthly mortgage payments and other living expenses if you and your income are taken out of the equation. 

You’re also in control of how long you have to pay premiums in order to keep the policy in effect. If you owe 15 years on your mortgage, choose a policy with a long enough term to cover it. Once you pay off the home and no longer need a financial safety net, you can safely allow the coverage to end.

On the other side of the argument, term life insurance is, as the name indicates, a short-term solution. If you outlive the initial term and don’t renew the policy, you’ll no longer be covered. Though it’s possible to extend these types of policies, doing so could ultimately be an expensive endeavor because premiums tend to increase significantly after the original term ends. 

Also keep in mind, unless you purchase a more expensive policy offering a return on the premiums paid over time, you’ll forfeit all the money put into a term life policy. Depending on the length of the term, this could add up to a considerable loss.

Whole life is designed to provide coverage for a lifetime, so it doesn’t have to be extended in increasingly costly increments. It’ll also be there as a windfall if you need to cash it out in advance since policies in this category build cash value. 

Having said that, whole life premiums are typically more expensive than those for term life. If, for any reason, you find yourself unable to afford those premiums, coverage will end, and you’ll lose the investment. 

Which Type of Life Insurance Policy Is Best?

No straightforward, one-size-fits-all answer exists to this question. Which type of policy is best depends on your unique situation. If you’re young and healthy, have dependents, are the primary breadwinner of your family, and have certain financial obligations, term life insurance would most likely serve you well. It’ll provide a monetary cushion for your survivors should you pass away unexpectedly.

Those who have no dependents or are nearing the later years of their lives may fare better with a whole life policy. It’s also extremely helpful if you have a sizable estate because it could cover any taxes and expenses on the assets you’re planning to leave behind for beneficiaries. Having said that, securing long-term coverage may be a challenge if you’re suffering from health issues.

Bottom Line

Both term and permanent life insurance are available for those hoping to cover their loved ones’ needs after they pass away. Several different types of policies fall into each category, so a broad range of options are at your disposal. Numerous consideration factor into the process of determining which type of coverage would best suit your needs. Don’t be afraid to reach out to the experts for further advice. 

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