An evaluation of your individual financial circumstances will determine your life insurance needs. There are two primary categories of life insurance contracts, term life insurance and permanent life insurance. Each plan has its advantages and disadvantages. Weighing these pros and cons, will determine which type of insurance best suits your particular situation.
Term life insurance specifies that the policyholder will pay the insurer premiums for a specified period of time. In exchange, the insurer agrees to pay the beneficiaries of the policy a specific benefit during the contractual period. The advantage of this type of insurance is that it enables the insured to buy a valuable policy for a relatively small premium. This makes term insurance, dollar for dollar, the best deal. People usually buy term policies to support their family until their retirement account is funded or the house is paid off.
One disadvantage of a term policy is that it’s temporary. Consumers who still need insurance after the expiration of their policy are riskier for the insurer because they are older and usually have health problems. These customers may find that a term life policy for their age group is very expensive or unavailable. Another disadvantage is that these policies don’t accrue a cash value.
Whole life insurance is a common type of permanent insurance and there are several advantages to these policies. There is no specified period and it covers the policyholder for their entire life. These types of policies also enable you to have access to a portion of the premium payments, because the funds accrue to the plan’s cash value. It may be possible to borrow against the cash value if funds are needed for emergencies. The policyholder can also list the cash value when applying for credit. Dividend payment is another possible benefit of the whole life insurance. These plans also enable policyholders with considerable estates to reduce the amount of death taxes owed by their heirs.
One disadvantage of the whole life insurance is that the initial premium payments are higher and therefore more expensive than an equivalent term policy. This reverses over the years as term premiums increase and whole life premiums decrease. Another disadvantage is that most policy agreements require consistent payments. If the policyholder doesn’t make regular payments, the policy will lapse.
Be sure to evaluate the advantages and disadvantages of each type of life insurance policy before deciding which plan is right for you.