Life insurance can be confusing to understand and even unpleasant to think about, but it is an important method of protecting your loved ones in the event of your untimely death. There are two basic types of life insurance, each with its own advantages and disadvantages, and there are also supporters advocating for the superiority of either one over the other. Permanent life insurance is a policy designed to be in place for several years and offering some level of investment power. Term insurance can also cover an extended period of years, but it is only a form of protection that pays out if you die while covered.
Permanent life insurance has some interesting options that also make it initially more expensive. Once your premium is established and a sum of money starts building in your account, you can actually borrow against it much more cheaply than going to a bank or lending service. Over the years the premium will remain the same and the taxes will be deferred until you decide to cash out. If you do have the misfortune of dying while the policy is in effect, whoever is your designated beneficiary usually does not have to pay taxes on the cash payment. Permanent life insurance is usually the best choice if you want a policy with a life of twenty years or more.
Term life insurance is much cheaper because there is no place for any investment potential or money return unless you die. At that time, your beneficiary receives the total amount of the policy, tax-free. Your premiums increase each time you renew your policy, and sometimes a company may require a new physical with each re-instatement. If your health has deteriorated, this could be a problem as well. On the positive side, term insurance is a cheap way to buy a lot of insurance for a period of less than ten years. Some money mangers suggest that you buy term and invest the difference between that and what permanent insurance would have cost you to get at least some return for your money.
The first step to purchasing life insurance is to assess your specific needs. Then choose the policy that matches those needs as closely as possible. Always buy for yourself and your spouse before you purchase for your child. Life insurance is not the best way to save for college. Stay away from the fancy riders that may be presented to you, but see if you can add on a waiver in case of disability. As long as you know what you are buying and why you are buying it, life insurance can offer peace of mind and extra financial protection for your family.
