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Life Insurance

You purchase life insurance for a specific time period, which may be anywhere from 5 to 30 years. You pay premiums for the entire length of the policy; once the term expires, so does the policy. If you pass away before the term ends, the policy pays a death benefit to your beneficiaries.

Cost-wise, term life is generally the most affordable type of life insurance. Premiums are based on your health and the amount of coverage you choose. The younger and healthier you are, the cheaper coverage is likely to be.


Term life can be broken down into a few different categories:                    

Level Term—Your premium and death benefit remain the same for the entire length of the term, whether that is 10, 20, or even 30 years.

Annual Renewable Term—The death benefit remains unchanged throughout the term, but the contract renews annually, usually with an increase in premium each year. Initially, premiums may be less than in a level term policy, but over time it can become more expensive.

Decreasing Term— the death benefit decreases each year while the premium remains the same. The policy ends when the death benefit reaches zero.

Advantages of Term Life Insurance

Term life policies offer the flexibility to buy only the coverage you need. 

Disadvantages of Term Life

Term life policies don't accumulate cash value. And having a specific term can also be a drawback. If you purchase a 20-year term policy and after 20 years decide you’d like to extend your coverage, you may need to undergo proof of insurability and could be denied additional coverage or need to renew at a significantly higher premium.

Universal Life

Universal life insurance is a type of permanent insurance that covers you for your entire lifetime, with a cash-value component. Instead of just selecting a specific term and putting all of your premiums towards the policy, part of your premiums will actually go into a cash account in the policy. This cash account earns interest and accumulates tax-deferred.

Advantages of Universal Life

Universal life insurance offers more flexibility than term life. Because it has a cash component, you could actually temporarily stop making premium payments as long as the cash value can cover the cost of insurance. In addition, you may also be able to increase or decrease the death benefit over time. Also, you can usually take tax-free loans against the cash value in the policy.

Disadvantages of Universal Life

Because it's permanent coverage, universal life tends to be more expensive than term life. While some of that added cost will be going into the account in the form of building cash value, the rates you earn on that money may not be as high as what you'd get from investing in stocks or mutual funds. That's why many financial professionals recommend buying term and investing the difference. This allows you to still purchase a death benefit while having the flexibility to invest the difference anywhere you choose.

Whole Life Insurance

As the name implies, whole life is meant to cover you for your whole life. Like universal life, whole life has a cash-value component. In most cases with a whole life policy, the premium and death benefit are fixed. The younger you purchase coverage, the lower your premiums are likely to be. Whole life is often marketed to parents as an investment for young children, on the premise that they can lock in coverage while they're young, making it more affordable once they become adults.


 

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