Life insurance provides financial protection for the people who depend on you. If you were to pass away, a policy's death benefit could help your family pay the mortgage, cover everyday living expenses, pay off debts or fund a child's education. The two main types of coverage, term life and whole life, work very differently, and choosing the right one depends on your needs and budget.
Term life insurance covers you for a specific period, such as 10, 20 or 30 years. If you pass away during the term, your beneficiaries receive the death benefit. If the term ends while you're still living, the coverage simply expires. Because it provides protection only for a set time and builds no cash value, term insurance is usually the most affordable way to get a large amount of coverage.
How whole life insurance works
Whole life insurance is a type of permanent life insurance. As long as you keep paying the premiums, it covers you for your entire life. Premiums are typically level and much higher than term premiums for the same death benefit. Part of each premium builds cash value, which grows on a tax-deferred basis over time.
You can borrow against a whole life policy's cash value or, in some cases, surrender the policy for its cash value. Loans that aren't repaid reduce the death benefit, and surrendering a policy ends the coverage and may have tax consequences. Whole life can be useful for lifelong needs, such as estate planning or providing for a dependent with special needs.
A common approach is to match the length of a term policy to your largest obligations, such as the years remaining on your mortgage or until your children finish school. Some term policies can also be converted to permanent coverage later without a new medical exam, which adds flexibility if your needs change.
Deciding how much coverage you need is just as important as choosing the type. Consider your income, debts, mortgage balance, future education costs and the savings and other coverage you already have, such as a workplace group life policy. Many people find that their employer coverage alone isn't enough.
Choosing the right fit
If you want affordable protection for a specific period, term life is often the best fit. If you need lifelong coverage and value cash value accumulation, whole life may be worth considering. Some households use a combination of both.
The insurance advisors at Finance Zone Point help families in Evanston and across Illinois compare policies, calculate coverage needs and find protection that fits their budget. Contact us for a free life insurance review.