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Term life insurance policies offer death benefits only. Term insurance is simple to understand and it allows you to purchase the most coverage for the least amount of money. You buy a policy for a specific amount and term, 15 years for example. If you die during that term, the policy pays the death benefit to your beneficiaries. If you outlive the term of the policy, you get nothing. However, you can renew the policy at much higher rates or convert the policy to a permanent form of life insurance.
The two key types of term insurance are level term life insurance (premiums remain the same over a specified period of time) and yearly renewable (starts out with a lower initial premium, but the premium rises each year).
The type of life insurance you buy will depend on your individual needs and what you hope to get out of your policy. It’s important to consider how much protection your family needs, how long you need coverage, and how much you can afford to pay in premiums.
If what you need is strictly income protection for a set amount of time, term insurance is the more appropriate and cost effective option. Term insurance works out particularly well if you follow the principle of “buy term and invest the difference.” This means you set aside and invest on your own the money you would have spent on a more costly whole life policy.
For people with more complicated or long-term needs, whole life insurance or one of its variations may make sense. For example, if you have contributed the maximum to your retirement savings and other tax-sheltered plans, you might consider whole life insurance because the cash value in the policy builds up tax-free.
As is the case with most important financial decisions, your life insurance choice should be made within the context of your overall financial plan and circumstances. A CPA can help you determine the type of policy that works best for you.