Over the next two weeks, we’ll discuss life insurance.
Life insurance involves a contract where the insurer promises to pay a beneficiary a sum of money in exchange for a premium, upon the death of an insured person. But who should have life insurance? While answering that involves some degree of personal preference and personal approach to risk management, there are certain people that life insurance tends to make more sense for. First are wage earners with dependents; if you have children or dependents and they would be significantly impacted financially if you were to pass, you should probably consider life insurance. This is especially true long-term if you have a dependent with special needs, as that financial support may be necessary beyond the age of 18. Also, people with significant debt, that would otherwise be left to a spouse or family member in the event of passing, may want to consider life insurance as a way to address the financial burdens that would be left with their estate. Unfortunately, your debts do not disappear when you’re gone!
Broadly, there are two common forms of life insurance. First is Term Life insurance. Term Life provides coverage for a specific defined period, like 10, 20, or 30 years. Term Life rarely includes a cash-value account, investment options, or a way to create “cash surrender value” – an amount of money that an insurance company would pay out if the contract were terminated before the insurer passes away.
The other common form is Permanent Life. Permanent Life insurance will cover you indefinitely until you die, and typically provides you options to create a cash-value account and create cash surrender value, possibly through investments. The major downside of Permanent Life, compared to Term Life, is that Permanent Life is typically more expensive for the same payout.
Which option makes more sense for you will depend on personal preference and your current situation – if you only want coverage until your children are adults, and prefer lower premiums over building cash value with the policy, Term Life probably makes more sense for you. If you like the idea of a cash value account, and would like coverage indefinitely until you die because of dependents with special needs or wanting to avoid leaving a large debt with your estate, Permanent Life may be the better choice.
Next week, we’ll return and conclude our discussion on life insurance!