Your need for life insurance changes as your life changes. You may need less life insurance when you’re younger, but as you take on more responsibilities and as your family grows, the amount and type of life insurance that fits your circumstances changes.
There are many different types of life insurance. But generally, life insurance policies fall into one of two categories, temporary or term insurance, and permanent or cash value insurance.
Term insurance provides coverage for a specified period ranging from 1 to 30 years. Premiums are typically lower compared to permanent life insurance. If you die during the coverage period, your beneficiary receives a specified death benefit. If you live to the end of the specified period, coverage ends and the policy has no cash value.
Unlike term insurance, permanent insurance continues throughout your life as long as you pay the premiums. As with term insurance, permanent insurance pays a death benefit to your beneficiary at your death, but it also contains a cash value account funded by your premium dollars. The cash value portion of the policy grows, tax deferred, as long as the coverage remains in force. With permanent insurance, you can tap the dollars in the policy even while you’re alive. You can borrow against the policy, and in some cases, withdraw part of the cash value. Keep in mind, though, that unpaid loans and withdrawals will decrease the death benefit available to your beneficiaries, and reduce the cash value, which may cause the policy to lapse.
What’s right for you?
Think about what protection you need and what you can afford before you purchase any type of life insurance. If you really need insurance but don’t have the discretionary income, term insurance may be your best choice. On the other hand, if you want lifetime coverage and you’re interested in accumulating cash value, then permanent insurance may make more sense.