Understanding Life Insurance

Financial literacy requires at least a basic understanding of life insurance. Though many are uncomfortable talking about life insurance, an individual or household cannot complete a financial plan without preparing for the inevitable. Determining how much life insurance they need often confounds life insurance buyers. Many life insurance agents recommend considering final expenses, living expenses for survivors, the cost of paying off a mortgage, and educational funding goals. Most households fit life insurance premiums into their budgets by purchasing a combination of permanent insurance and less costly term policies.

Understanding the different types of life insurance allows for informed decisions on the type of coverage needed.Start reading for all of the necessary information.

Permanent Life Insurance

Permanent life insurance remains in force until the insured individual dies. The exceptions to this are if the policy owner cancels the policy or fails to pay the premiums. So long as the policy remains in force, the policy always pays the death benefit. Additionally, permanent life insurance policies provide a savings benefit, which may be a cash value that builds up as the insured makes premium payments. In this case, the policyholder has the option of borrowing against the cash value. Alternatively, the savings benefit may consist of invested funds, which the policyholder can withdraw from the policy without a loan. Permanent policies offer tax advantages, such as death benefits and proceeds from a loan against cash value being nontaxable. Invested values withdrawn (as opposed to loaned) are taxable, but only when withdrawn, and they accrue inside the policy tax-free. Permanent life policyholders must ensure any loan balances and unpaid interest never exceed the cash value. In that case, the policy terminates.

Continue reading to learn about the details of term life insurance policies.