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Two Types of Life Insurance -
One You Should Avoid
One You Should Avoid
Life insurance is a type of insurance that protects your income in the event of a death or critical illness. You typically need life insurance
if you have other people - a spouse or children - depending on your income. Certain people don't necessarily need to purchase life insurance.
Those who are single and don't have children, wealthy people who don't have to work, minor children, and retired people with no debt who are
living off their retirement savings should think twice about buying life insurance.
There are two major types of life insurance. Term life insurance and cash value life insurance. With term life insurance you pay a monthly premium to be insured for a certain amount for a certain period of time. In the event of your death, the term life insurance policy pays your beneficiaries the value of the insurance policy. If you don't die while your policy is in effect, your premiums are gone forever. It's similar to auto and homeowners insurance where you only get the benefit of the insurance in specific events.
Cash value life insurance combines your insurance policy with a savings feature. Part of your premium is put into a savings account or mutual fund to grow over time. Unlike term life insurance policies, cash value life insurance insures you for life. But, you don't pay an insurance premium for your entire life. Instead, you pay premiums on the insurance for a period of time, say 20 years. After that, the insurance cost is covered by the savings you've accumulated in your with your insurance policy. When you pass away, your beneficiaries receive the entire savings, the death benefit, or some combination of the two, depending on your policy.
The monthly premiums on cash value life insurance policies can be up to 7 or 8 times higher than that of term life insurance policies. You could, quite possibly, purchase term life insurance for the lower premium and invest what you would have spent on a cash value life policy into your own savings account or mutual fund. Some experts say you would have a higher return on your own investments than you would with a cash value life insurance policy.
Many insurance agents will try to push you into purchasing a cash value life insurance plan, which are also called whole life, universal life, and variable life insurance. That's because insurance agents earn higher commissions on cash value life insurance sales than they do with term life insurance.
Insurance agents attempt to attract consumers to cash value life insurance with the feature of being covered for life. However, you don't necessarily need to be insured for life. Remember that if no one is depending on your income, you don't need to have life insurance. This is especially true in your retirement years when your children have become independent adults, all your debts have been paid, and you're living off your retirement income.
Cash value life insurance might be an option for people who could have estate tax issues. Otherwise, for most people, term life insurance is the better option of the two.
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