Term Life or Permanent Life Insurance?

By Compuquotes Team on March 26th, 2008

There are two basic types of life insurance - term life and permanent life. Although there are important differences, the basic concept is the same - to guarantee a lump sum of money for dependents in the event of the insured's death. One big advantage - in most cases, the money is tax-free.

The type of insurance that works best for you will depend on several things - your age at the time the policy is taken out, the amount of coverage provided and the cost of the premiums. And keep in mind that you may not need life insurance at all if you have no dependents. The cost of life insurance varies according to a person's age, occupation and general health.

Term life insurance is designed to insure a person for a particular period - or term. Policies are usually renewable and coverage generally ranges from one to a hundred years. If the policyholder has a serious accident, he or she can claim on the policy; it also pays out to the family of someone who has died.

Some financial experts recommend a person under 40 and in good health should choose term life insurance. Term life insurance is generally more affordable than other types of life insurance, as it builds no cash value - unlike other policies. This type of life insurance is particularly suitable for a young couple with children - it offers the coverage they need at an affordable price.

One disadvantage of term life insurance is that the cost tends to increase as you get older - making it generally more expensive than permanent life. If you are over 65, term life insurance will be expensive - and most companies won't usually sell term life insurance to someone, if the term continues past the applicant's 80th birthday.

There are three basic types of permanent life insurance - universal, variable universal and traditional whole life. Variable life insurance policies build up a cash reserve that can then be invested in several different ways. One disadvantage is that, like any other form of investment, it can be risky - the value of your death benefit may decline if your chosen investments don't perform well.

Whole life insurance is also known as ordinary or straight life insurance. One of the benefits is that it usually has a minimum interest rate; this type of life insurance also has guaranteed premiums and death benefits. Whole life insurance also builds up a cash reserve - although you can't control how it's invested.

Universal life insurance can offer even more flexibility - you may be able to increase the amount of the death benefit, after passing a medical exam. You also have the option of paying smaller or larger premiums, depending on what you can afford at the time and can also use part of any accumulated earnings to pay part of the premium cost. Because of its flexibility, the administrative costs tend to be higher.

Life insurance is one of the most important purchases you can make. It's worth taking the time to find out what kind of policy is right for you

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