YOUR life POLICY

Two basic types of life insurance, explained:

Term life insurance

Term life insurance provides coverage for a certain time period ie the reason why it is called term insurance. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the death benefit, which can pay off a mortgage, pay college tuition or final expenses. The policy has no other value.

Policies often have terms of one year to 30 years. The most common coverage term is 20 years. Possible options  for term and can often be converted into whole life or renewed.

It’s wise to choose a term that coincides with the years your family would be most  vulnerable, along with an amount they would need if you were no longer there to provide for them. The payout would replace your income and help your family pay for services you perform now, such as home maintenance and child rearing.

If planned correctly, your family’s need for life insurance will end around the time the term expires: You’ll have paid down your mortgage, your children will have completed their education, and you’ll have savings to fall back on.

Whole life insurance

Whole life can provide lifelong coverage. The difference between the two policies is often compared to the difference between renting an apartment and buying a house. Like purchasing real estate, a whole life policy includes an investment component known as the policy’s cash value. The cash value grows, tax-deferred, meaning that you won’t pay taxes on its gains while they’re accumulating. You can borrow money against the account or surrender the policy for the cash. If you don’t repay policy loans with interest, you will reduce your death benefit, and if you surrender the policy, you’ll no longer have life insurance and you’ll have tax consequences.

Some whole life policies can also earn annual dividends, a portion of the insurer’s  surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.