You’re probably familiar with life insurance’s “death benefit” – the payout that can help provide for your family after you’re gone. But life insurance’s role as a financial planning tool kicks in as you choose the length of your policy and as you consider the savings components of certain policies.
Consider the different options in a life insurance policy as you make your family’s financial plan.
Term Life Insurance: For Coverage of Life’s Milestone Expenses
Young families have lots to look forward to, from buying a first home to watching children grow up. It makes sense to have a plan in place to cover expenses associated with these events, in case the unexpected happens.
That’s why the Insurance Information Institute (The III) suggests that families who need coverage for a specific period of time should consider term life insurance for one parent or both. Term life insurance enables you to select a length of policy that mirrors your needed coverage period.
For instance, if you have a 30-year mortgage that you want to ensure will be paid off if you’re gone, consider a 30-year policy. Parents with young kids who want to ensure funds are available to help pay for their college education if a parent should pass early might buy 20-year term life insurance.
One other benefit of term life insurance? This type of policy typically has lower payments than permanent life insurance, which can be more affordable for families just starting out.
Permanent Life Insurance: Built-In Emergency Savings
Permanent life insurance policies enable you to build cash value, separate from your death benefit. A portion of each payment you make to a permanent life policy goes toward insuring your life, while the other portion goes to building up cash value.
Your policy’s cash value can be withdrawn or borrowed from for life expenses.1 It’s important to know, however, that doing so could reduce your policy’s death benefit, cause the policy to lapse or result in a tax liability, so it may be best to consider the cash value as a source of funding only for unexpected emergency expenses.
A permanent policy’s cash value has another benefit – it can be used to pay premiums to keep the life insurance in force if you encounter financial difficulty and can’t otherwise make payments, the III says.
While permanent life insurance typically costs more than a term policy, its protection can last a lifetime (rather than for a certain time period) and it may offer the opportunity to build cash value (unlike term insurance). Additionally, you may have the option of choosing premiums that stay the same for the length of the policy, which means your budget for life insurance coverage remains steady until your policy pays out.
Life insurance can be a tough subject to talk about, but it can also help you protect your family’s financial future. Speak with a life insurance agent to better understand what type of life insurance policy can fit your needs.
This guest post comes from the editors of The Allstate Blog and Allstate.com Tools & Resources section, which help people prepare for the unpredictability of life.
1 Loans or partial withdrawals can reduce the policy’s cash value and death benefit, can increase the possibility of policy lapse, and may result in a tax liability. Consult a tax advisor for additional information on the tax treatment of loans or withdrawals from a life insurance policy.
Life Insurance offered through Allstate Life Insurance Company, Northbrook, IL; Allstate Assurance Company, Northbrook, IL; Lincoln Benefit Life Company, Lincoln, NE and American Heritage Life Insurance Company, Jacksonville, FL. In New York, life insurance offered through Allstate Life Insurance Company of New York, Hauppauge, NY.
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