Why Get a Life Insurance Policy?
Planning for our own death, or the death of a loved one is not something that many of us want to do. But having support in place when the unfortunate happens can help those left behind take care of arrangements and recover from the loss easier. A life insurance policy can be an important part of that support.
Life Insurance Basics
A life insurance policy can help you:
- Provide income to surviving family members so they can maintain their lifestyle.
- Pay off the mortgage if an income earner were to die so the house is free and clear of debt.
- Provide for a college education if there are dependent children in the household.
- Pay for final expenses of a funeral or estate settlement costs.
- Provide an emergency fund to handle an unexpected financial crisis.
- Provide for settlement of personal debts.
Term Life Insurance vs. Cash Value
There are many differences between a term life insurance policy and a cash value life insurance policy. Understanding what cash value life insurance can be used for is important in making the right decision as to what insurance coverage is best for you and your family.
Term Life Insurance Policy:
- Permanent coverage until the end of your life unless you surrender or lapse the policy.
- Initial premiums may be higher because the premiums are not only used to pay the mortality costs covered in term life insurance rates, but also contribute to the accumulation of a cash value which typically reduces the amount of mortality risk you have to pay for as you age. This cash value can be accessed through partial withdrawals or loans to supplement retirement programs, help manage a mortgage, or get emergency funding, for example.
- Preferential tax treatment. The cash value earnings usually grow tax deferred and therefore are not included in current taxable income until withdrawn.
- Term life insurance is purchased for a limited time so it is considered temporary coverage.
- Usually initial lower premiums which may increase over time.
Mortgage Insurance Policy
Mortgage Insurance policy is a type of term life paid by borrowers. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds. An owner of property, who has taken out a mortgage on the property, can purchase mortgage insurance policy. Mortgage Insurance pays off the mortgage upon the death of the mortgagor/owner. While this may seem desirable, the high-cost premiums are not usually justified by the benefit. Premiums remain level, even as the policy's benefit decreases.
This material contains only general descriptions and is not intended as tax advice. Please consult your tax advisor for specific tax questions. For information about your specific term life insurance needs or situation, please contact your insurance agent.