Life insurance policies are designed to protect your family by providing financial compensation after your death. While it is an unpleasant prospect to consider, purchasing life insurance is an important responsibility, particularly when you are the head of your household.
The amount of life insurance each family needs will vary greatly. At a minimum, life insurance should cover the cost of funeral expenses and provide enough income to support your surviving family members during the transition period after your death. You may also want to allow enough money to cover important expenses, such as your mortgage or college tuition for your children.
Different types of policies are designed to meet the needs of any family. The policies are divided between two types: term life insurance and whole life insurance.
When purchasing term life insurance, you are buying protection for a specific period of time. The term can vary, but it is commonly sold in increments of five, 10 or 20 years. At the end of the term, you have the option of renewing the policy. The policy holds no cash value.
Term life insurance may be offered through your employer as part of your total compensation package. Often the policy begins with a payout that is equivalent to your annual salary. Supplemental insurance can be purchased to increase your amount of coverage, though you may need to pass a physical examination.
Whole life insurance, also known as permanent life insurance, has no set time period. You will be protected as long as you hold the policy. Whole life insurance also has the benefit of holding cash value. The money you pay through your monthly premiums can later be cashed out if you decide to sell the policy.
Whole life insurance is more expensive than term life insurance. While it does have a cash value, it is not always the best financial option for everyone. An insurance expert can help you review your needs to decide which type of insurance is best for your family.
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When it comes to choosing between term life insurance and whole life insurance, it's important to understand the potential advantages of whole life insurance. Compare the differences to decide if purchasing a whole life insurance policy is for you.