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A life insurance policy will pay a specified dollar amount to one or more beneficiaries when the owner of the policy dies.
Life insurance can be helpful when the primary wage earner dies and their spouse and children are in need of additional financial support. It can also provide a safety net if the family has a mortgage, loan or other large liability that would be difficult for the survivors to pay off on their own.
There are two main types of life insurance: permanent life insurance and term life insurance.
Permanent Life Insurance
Although permanent insurance is more costly than term insurance, one major benefit is that it can’t be canceled as long as you pay the premiums on time.
Another potential benefit is that it can be viewed as an investment. After taking a commission for the salesperson, the insurance company will invest your premium payments. A share of the returns from the investment is credited to your account.
Eventually, you can use your share of the investment yield to pay the premiums on your permanent life insurance. Or you can choose to pay the premiums and let the investment returns build in your account. If you ever decide to cancel your policy, the investment returns will be paid to you. However, you won’t receive the amount that you have paid in premiums through the years.
There are many varieties of permanent insurance, including universal, variable, variable universal, single-premium, survivorship, and “first to die” insurance.
Term Life Insurance
If you only need insurance for a specific time period, term insurance may be the best option. Term insurance provides coverage for a specific number of years. If you die during that time period, the policy will pay a specific dollar amount to your beneficiaries. However at the end of that time period, the policy expires and becomes worthless. In some cases, the policy can be extended or renewed.
One benefit of term insurance is that the payments are lower than for permanent insurance. So term insurance may be useful if you only want coverage while your children are young and financially dependent on you. Once they become old enough to be financially independent and the term of your insurance expires, you won’t need to continue paying for the policy.
Another use of term insurance coverage would be to pay off a mortgage or other debt if the family’s main wage earner were to die. If the amount of the insurance is sufficient to pay off the mortgage, this can ensure that the surviving spouse won’t lose their home if they can’t make the payments. And by eliminating the mortgage payments, their monthly budget will also be reduced.
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