The purpose of any type of insurance is to protect you from an economic loss. Life insurance is no different: its purpose is to protect your family from economic loss resulting from your passing away; and to provide a sum of money to those who depend on you once you’re no longer able to provide for them. Two kinds of life insurance are term and cash value.
Term Life Insurance
Term life insurance provides you a death benefit in the event you, the insured, pass away during the term of the policy. For example, if you purchase a term life insurance for 10 years in the sum of $100,000, and you pass away at any time during those 10 years of coverage, the insurance company will pay the $100,000 to your beneficiaries, assuming you have continued making the premium payments. If you survive the 10-year term then, of course, your beneficiaries receive no money. You can usually renew for a like or longer period of years at the end of the policy if you meet the requirements stated in the policy.
Term life insurance is cheaper than cash value-roughly, you can buy almost three times the amount of insurance for about one-third the cost of an equivalent amount of cash value insurance, assuming you are a non-smoker and are otherwise in good health. With term insurance, you are protecting you family by providing a sum for them to live on if you’re not there to provide for them.
Cash Value Life Insurance
Cash value life insurance provides life insurance but also has an investment feature. The theory is that if you do not pass away, you get a return of a portion of your money.
The premium must include enough to pay for the cost of the life insurance and the investment. In reality, you are receiving a return of a portion of the money you paid to have invested for you. As a result, cash value insurance costs more than term because you are paying an additional sum to be invested.
Examples of cash value life insurance include whole life, variable life, universal life, and variable universal life. Except for some distinguishing features of each of these types they are very similar.
Usually, cash value life insurance does not begin to accumulate “cash value” until you have paid enough into it to allow it to grow, usually 3 or more years after the policy was purchased. In later years, if the premium stays the same, but the cost of insurance goes up, the difference will be taken from the cash value accumulated in the account.
If you want to access the money in your cash value, you must borrow it. In essence, you are borrowing back the very money you put into the policy. If you do not pay the money back into the policy, any unpaid balance will be deducted from the proceeds of the life insurance policy if the policy has to be paid to your beneficiaries because you passed away.
In addition, cash value life insurance contains a surrender charge, stated as a percentage of the cash value accumulated. This charge applies if you want to take the money and end the policy coverage. The charge is usually applicable during the early years of the policy; you should determine the number of years for which a surrender charge is applicable.
Term or cash value life insurance both will provide you protection for your family. Deciding which policy is best for you depends on how much you want to spend for that protection.