Insurance Basics of Term or Permanent Life Insurance
In understanding the various life insurance basics, look at your insurance choices like a shopping cart at the supermarket.
This shopping cart represents your insurance needs.
Your needs and the reasons you buy life insurance vary.
The number one reason people buy insurance is to replace your annual earnings if you were to die prematurely. Term insurance is the most popular type of insurance for this purpose. Particularly in your early years of raising a family.
But people buy life insurance for other reasons.
People buy insurance
- to protect their estate to cover taxes lost at death
- Or they buy insurance as a tax-sheltered investment alternative
- Some buy it to leave a larger legacy to their favorite cause or charity
- Business owners buy it to protect their business and their family
The type and amount of insurance you buy determines how much you will spend on insurance.
Your Premium You Pay Depends on Type of Insurance
Term insurance is the cheapest. It is temporary insurance that will insure you until you reach a certain age - for example age 75. (this varies amongst policies.)
There are no savings attached to the insurance. It is insurance only. The purpose is to protect you until your savings and investments have build up to a point when you no longer need the insurance to provide income in the event of your early demise.
Permanent : Whole Life or Universal
It has no expiry date.
It runs until you die and your beneficiary is paid at that time.
To provide permanent protection, a pot of money will have to grow inside the insurance policy to provide for the eventual payout to the beneficiary.
This pot of money will accumulate as a result of money you have paid into the policy and what the profit that these reserve funds can generate.
One of the key differences between whole life and universal life is that, in the case of universal life, you actually own and control the cash value.
You can withdraw cash from the policy if you wish to do so.
In the case of whole life, you receive the cash value only if the policy is canceled. The company owns the cash value.
While you can borrow from the cash value, it will stand as a loan, not a withdrawal. If you should die, any outstanding loans will be subtracted from the death benefit before it is paid out to the beneficiary.
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