A life insurance policy states that you will pay premiums to an insurance company over time, and, in exchange, the company may pay a lump sum amount to a designated beneficiary upon your death. The money from your life insurance policy can help pay bills and help support your surviving family members’ living expenses. You may need to adjust the amount of your life insurance policy related to major life events, like buying a home, getting married, or having a child.
Whole (or universal) life insurance policies
Whole (or universal) life insurance policies are considered permanent. As long as you pay the premium, the policy is in effect. You can accumulate cash value over the life of the policy. You may be able to borrow money from these types of plans, if you need to.
Term life insurance
Term life insurance policies are in effect for a certain period of time, or term. If you have this type of policy and pass away during the term that the policy is in effect, the insurance company may pay a benefit. If you live past the time that the policy is in effect, the insurance company won’t pay a benefit or give you a refund.
Term life insurance policies are usually less expensive than whole life insurance policies. This is because term life insurance policies only cover a set amount of time, while whole life insurance policies are intended to be permanent.
Considerations for a life insurance policy
Most people buy life insurance to help provide financial security for their families upon the death of the insured person. If this is your reason, the first step in calculating how much insurance to buy is to identify your dependents’ likely financial needs. If you are married, in a civil union, or have a significant other, you will want enough coverage to minimize your spouse’s or partner’s financial need after you are gone. If you have dependent children, you may want to help pay for their college tuition and other expenses. If your annual living expenses such as a mortgage on your home, personal or car loans, or property taxes are fairly high, you will need more insurance than someone whose home mortgage is fully paid for.
You may also want enough coverage to ensure that your dependents do not have to pay for your final expenses, such as hospital bills and burial costs.