The reasons why someone might consider purchasing life insurance are obvious. A good life insurance plan can help assure your family is financially secure regardless of what the future may have in store. But even once you have decided you want to purchase life insurance, there are still several important decisions you are going to have to make.
Though all life insurance plans are designed with the same primary goal, each specific plan can be entirely unique. Beyond deciding how much life insurance you are going to want to purchase, you will also need to decide what kind of life insurance is best.
There are two primary types of life insurance policies. The most common (and most affordable) type of life insurance coverage is known as term life insurance. The other primary type of life insurance is known as permanent life insurance. Before making any major decisions, it is important to understand the differences between these two categories.
The Difference Between Term Life and Permanent Insurance Coverage
Understanding Term Life Insurance Coverage
Term life is the most common type of life insurance and is also the easiest to understand. A term life insurance policy is quite similar to other insurance policies you may already own (car insurance, homeowner’s insurance, etc.). As a policyholder, you are expected to pay a monthly premium. In exchange for paying this monthly premium, the insurance company will promise to pay your beneficiaries a predetermined amount of money in the event of your death during the policy’s term.
As the name might imply, term life insurance coverage provides coverage for a finite amount of time. Most term life insurance policies last for 10 or 20 years, but other term lengths are usually available. If you do happen to outlive your policy’s term length, you will no longer be eligible to receive the benefits associated with it. Before your term ends, however, you will frequently have the option to renew your policy and continue coverage.
Many people purchase term life insurance coverage because it is an affordable way to protect their family from financial distress. Depending on your age, health, and lifestyle, you may be able to qualify for term life insurance policies that cost less than $10 per month.
Understanding Permanent Life Insurance
Unlike term life insurance, a permanent life insurance policy can offer you coverage that will last your entire life. Permanent life insurance policies are notably more expansive than their term-limited counterparts but also provide some additional benefits.
One of the reasons why many people prefer permanent life insurance policies is that once you have qualified for coverage, you never have to worry about requalifying in the future. Additionally, these policies can be treated as a form of equity that offers policyholders their own cash value.
The cash value component of your life insurance policy is something that gradually increases over time. This value is something that is legitimately yours to claim—if you would like to borrow from this cash value in the future, you will have the opportunity to do so.
Though the cash value component of a policy shouldn’t be treated the same as a savings account, it is certainly a desirable asset to have. One of the most attractive characteristics of a permanent life insurance policy is that in addition to having financial security, you will also have the option to be building wealth over time.
Hybrid Life Insurance Policies
Both term life insurance coverage and permanent life insurance coverage have various pros and cons associated with them. While term life insurance coverage is usually the most affordable, permanent policies enable the ability to accumulate personal equity.
In order to balance the benefits and costs of these types of coverage, many individuals are interested in obtaining hybrid life insurance policies. A hybrid policy will usually cost less than a permanent policy but also offer more benefits than a term policy. In a sense, these types of policies are similar to owning two smaller policies (one of each kind) at the same time.
In addition to creating a hybrid policy, you may also have the option to convert your term life insurance coverage into permanent coverage. ‘Conversion’ is an excellent option for individuals who are able to afford higher monthly premiums than they once were able to and are also looking for ways to build equity.
Which Life Insurance Policy Is Right for You?
There is no “correct” life insurance strategy that can be applied to all people. The type of life insurance policy that is best for you and your family is going to depend on a variety of different factors.
If you are hoping to pay low-monthly premiums while still establishing a sense of financial security, you may want to consider term life insurance coverage. If you are hoping to get more out of your policy and are willing to pay higher premiums, then permanent coverage may be a better option.
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