There are numerous ways to purchase life insurance. In the end, there are two types of policies: term insurance policies and whole life insurance. Term life insurance covers you for a set of period (the term) and then expires. Whole life insurance, on the other hand, is a type of permanent life insurance that covers you for the rest of your life. There are other insurance plans that fall into these two categories, each with its own set of advantages and disadvantages.
Term life insurance
Term life insurance is only valid for a certain number of years before it expires. If you pass away before the term is over, your selected beneficiary collects a prearranged sum of money known as the death benefit. Term life insurance is the most basic and easily available type of life insurance policy.
When you make monthly payments (also known as premiums), you are contributing for the death benefit that will be paid to your beneficiaries after you die. The death benefit might be paid out in the form of a flat sum, monthly payments, or an annuity. The majority of people choose to receive their death benefit in the form of a lump amount.
Term life insurance policies are often less expensive than other forms of life insurance policies and have reduced premium payments. For a healthy 35-year-old female, the monthly average premium cost for a 20-year, $500,000 coverage is $24.39.
Whole life insurance
Whole life insurance, on the other hand, is a perpetual life insurance that never expires. It includes a death benefit as well as a cash value, which is an investment-like, tax-deferred savings account. The monetary value earns interest at a certain fixed rate.
Each month, a part of your premium will be invested in the policy’s cash value, which provides a fixed rate of return (the particularsum that goes into funds is determined by your individual policy). The cash value of the policy develops over time and can be redeemed or used to make a loan when it has accumulated enough value.
As long as you’re paying the premiums, you will have lifetime coverage. However, because of surrender costs, tax, interests, and other stipulations, whole life is more complicated than term life when you compare life insurance.
Whole life insurance may be advantageous if you require the cash value to finance endowments or estate arrangements, or if you have long-term dependents, such as disabled children.
Universal life insurance
Universal life insurance, like whole life insurance, has a monetary value. Your premiums are applied to the cash value as well as the death benefit. However, there is a catch: you can adjust the premium and death benefit levels without having to purchase a new policy.
Although a minimal premium is required to maintain the insurance in force, the cash value can be used to pay that premium. That is, if you do have enough money in the dollar value, you can forego premium payments entirely and let the interest expense do the work until the cash value is gone.