Determining What Type of Life Insurance Is Right for You

At its most basic, life insurance is a contract between the insurer and the policy owner. In the event the policy matures or the insured individual (or several individuals) dies, the insurer agrees to pay a sum of money and the policy owner agrees to pay a specific amount of money at regular intervals (usually monthly or quarterly) known as a premium.

There are two basic types of life insurance: whole and term. It is important to understand the difference between whole life insurance and term life insurance before you even begin contact the insurance company to get rate quotes.

Determining What Type of Life Insurance Is Right for You
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Whole Life Insurance

A whole life insurance policy covers the policy owner (or whomever the policy was taken out for) for their entire life. The death benefit and premium will remain the same throughout the life of the policy.

This type of life insurance also builds cash value, by giving a return on a portion of the premiums paid that the insurance company invests. This cash value is a tax-deferred investment until you decide to use it. You are also able to borrow against the cash value of the whole life insurance policy.

There are a few different choices within the arena of whole life insurances, including traditional, single-premium and interest-sensitive.

Traditional whole life insurance policies give a guaranteed minimum rate of return on the cash value.

Single-premium policies are designed for those with a large sum of money and want to purchase the entire policy up front. This type of whole life insurance also accrues a cash value and has the same tax shelter on its returns.

Interest-sensitive whole life insurance policies give a variable rate of return on the cash value portion of your policy. With this type of whole life insurance policy, you have the most flexibility, such as increasing the death benefit without affecting your premiums.

Some of the benefits of choosing a whole life insurance policy include the investment value. Since a portion of premium money goes toward your cash value, this essentially could pay off the entire policy after only a few years.

Another benefit is your premium will remain constant during the time you are covered, unless you opt out, plus, unless you make a change, you will be covered for the remainder of your life, with no medical exam.

Many people use whole life insurance as an investment, although the return is usually very low compared to other investments, even with the tax benefits.

If you do choose to use whole life insurance as an investment tool, it should not be the only item in your portfolio. Discuss this option with a trusted financial adviser or planner.

You can also check research options on either whole life insurance or term life insurance with many online insurance company’s Web sites.

Term Life Insurance

Basically, term life insurance is life insurance for a specific period of time. Term life insurance is a lower cost choice, with lower premiums, especially for those who are in good health and young. The coverage is purchased for a specified time period, one, five or 10 years and during that time you pay a specific premium.

Unlike whole life insurance, the death benefit may change with a term life insurance policy. You are able to choose whether you want a decreasing, level, or increasing term life insurance policy, and these policies are renewable or convertible when the policy ends, although you may be subject to another medical exam to determine if you are still a good candidate.

Compare to a whole life policy, term life insurance does not have the tax benefits and it does not build a cash value. However, it is one of the best options for someone who wants insurance, but cannot afford a high premium.