Once you realize you’re behind the eight-ball – and behind the game – when it comes to life insurance coverage, it’s time to play catch up. The reality often sets in right around the moment your first child comes home. You’re suddenly struck with the realization that there are people I love who depend on my income.
That’s some heavy business to consider, and to get it right, life insurance should be an essential part of your long-term financial planning.
You’ll need to find an insurance provider that is financially secure. You need to rest assured that your provider, and your coverage, will be there when you need it. You’ll also need policies that are flexible and affordable enough to fit comfortably into your budget.
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There are two major types of life insurance: term and permanent, and permanent insurance is also known as “whole life” coverage.
Term life insurance is designed to provide coverage during a set timeframe, and typically, when it expires, has no cash value.
Whole life insurance is good for your “whole’ life, provided you continue to pay your premiums. While with permanent life insurance, a payout is guaranteed, such policies are much more expensive – up to 10 times the price of term insurance. The cost may seem high, but permanent life policies also operate as tax-deferred savings accounts which earn interest over time. As a portion of your premium goes into the savings account, you can use those funds as collateral against a loan. In addition, the interest that account earns can be used to pay your premiums if you wish. But keep in mind that should you cash out your account, you’ll also eliminate your death benefits.
Experts often debate the values of term vs. permanent life policies. One argument for term insurance relies on touting the value of the savings component and says the difference in premium payments for permanent policies could be better used by investing the amount you’d pay for the more expensive permanent policy in another way such as a contribution to a 401(k).
On the flip side of the argument, those who favor permanent policies say the fact that term insurance has no accrued value once it expires, permanent policies will always retain some value.
Here’s the bottom line: Term life policies offer the most bang for your premium buck, and they also have the benefit of covering the period of years when such protection is absolutely critical. You can’t expect your kids to be capable of providing for themselves when they’re young. You can expect them to be prepared at the end of a 20- or 30-year term policy to have built up some financial self-sufficiency.