This time of year, I always seem to get a lot of mail about "Life Insurance." Most people want to know if term life insurance is better or worse than permanent life insurance.
Term life insurance is by far the most affordable way for the general public to get a life insurance policy. Term life insurance is only good for a certain amount of time. Most policies are good for 5, 10, or 20 years. The cost of the premium will go up as the age of the insured person goes up. The mortality rate, which is usually based on a person's age, sex, and whether or not they smoke, is used to figure out the premiums.
With this kind of policy, the insured or the owner pays a set premium for a set amount of time. If the insured person dies during that time period, the insurance company gives money to the beneficiary. Most of the time, income taxes do not have to be paid on the death benefits.
In term life insurance, there are four parties:
(1) the owner pays the premium;
(2) the insured is the person whose death will give the beneficiary a death benefit (face value);
(3) the beneficiary is the person who will get the insurance proceeds when the insured dies; and
(4) the insurer is the company that gives the insurance. Depending on the company you choose, you can pay your insurance premiums monthly, quarterly, or annually. For example, Fred pays XYZ Company $50 a month to cover his wife Margaret's life for the next 10 years. During the 10 years of the contract, if Margaret dies, XYZ company will pay $25,000 to Joe (son of Fred and Margaret). In this case, Margaret is the insured, Fred is the policy owner, Joe is the beneficiary, and XYZ Company is the insurer. If Margaret doesn't die within 10 years, XYZ Company won't have to pay any of the people involved any money. Most of the time, the owner is also the insured. That is, a person buys an insurance policy on himself and names a beneficiary. Most of the time, husbands and wives buy life insurance for each other.
What is Life Insurance for a Term? It is a legal agreement with terms, conditions, and risks that both parties agree to. There may be special clauses in the agreement, such as "suicide terms," which say that if the insured person kills himself or herself, the beneficiary doesn't get any money. There are two main ideas behind term life insurance: (1) Theory of Decreasing Responsibility and (2) Buy Term and Invest the Difference (BTID). With term life insurance, the insurance company's responsibility or liability goes down as the policy nears its end. The fact that there is no cash value at the end of the period makes term life insurance the most affordable type of insurance available to the public. Studies have shown that with term life insurance, the death rate can be as low as 1%. So came the idea of BTID.
Instead of getting permanent life insurance, which gives the owner a cash benefit at the end of the agreed-upon period and has a savings component, it is thought to be cheaper to buy term life insurance and invest in other areas to cover the savings component.
With good returns on investments in the current market, term life insurance is a better choice than permanent life insurance.
