Life insurance is unusual — it is the only type of insurance not solely based on risk but on the inevitable death of an individual. This uniqueness, however, is exactly what makes choosing the right policy more important. Life insurance aims to protect dependents and loved ones from lost income and creditors upon the policyholder’s death. Of the many policies, the one that suits your individual needs depends on your state in life, and term and whole life policies are the most common.
Term Life Insurance
A term policy works like a lump-sum payout. Over a specified time, usually between 10 and 30 years, the policyholder makes periodic payments. If the policyholder passes away before the time is complete, the insurance company will pay a promised lump sum of cash to the specified recipients, called beneficiaries.
The insurance company takes the risk that if the policyholder dies during the period, it must pay the written amount. In assessing this risk, younger individuals tend to find term life insurance more affordable because they generally have a lower risk of death.
If the policyholder outlives the term policy, everyone receives peace of mind that the family would not have fallen into financial ruin if a tragic accident were to occur at some point during the policy. Depending on the policy’s terms, there may be an option to renew the policy into a new period or convert it into whole life.
Whole Life Insurance
Unlike a term policy, a whole life insurance policy works more like a savings account that is insured and has no expiration. With a whole life policy the policyholder makes periodic payments up to a specified dollar amount, regardless of how long it takes to reach that goal. The savings goal is the total value of the policy.
Upon the policyholder’s death, the beneficiaries receive a refund of all the holder’s payments, called the cash value, along with a “death benefit.” The death benefit is the difference required to meet the savings goal. In this, the holder can ensure that the beneficiaries will receive the policy’s promised value.
Further, whole life policies are flexible. The holder can terminate it to receive a full refund, called the nonforfeiture right. Also, while risky, the holder may borrow against the cash savings should such a need arise.
Which One Works for Me?
Life insurance is a wise investment for those with dependents or anyone otherwise financially secure under their income. A few things to consider when choosing a policy are inflation, age and income, and the number of dependents. Term life insurance tends to be more affordable but has a reputation for paying out the least, and whole life is a bridge to self-insurance.
To discuss which policy would be best for you and your family and to explore other potential options with local Tulsa financial planners, contact First State Investment Advisors at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.