What are the advantages of this type of insurance?
Term life insurance policies tend to be a lot less expensive in comparison to other types of insurances, including whole life insurance, universal life insurance and variable life insurance for example. Term life insurance also typically has a very, very specific period of coverage, which is typically expressed in terms of 10 years, 15 years, 20 years, 25 years or 30 years. What this does is that it allows you to only buy the amount of coverage that you are actually going to need. For example, if you are only concerned about having life insurance coverage while you have children living in your home or while you still have a mortgage or a car loan that needs to be paid, then you can figure out exactly how much coverage that you need and do not pay any more than that.
What are the disadvantages of this type of insurance?
There isn't any cash value component associated with this type of insurance policy. Your premiums are strictly going to go toward paying the policy, and they are not going to earn any interest for you, or otherwise accumulate in any way, shape or form. Having a specific term, while it can be advantageous, is also capable of being a drawback for you. Should you happen to purchase a term policy of 20 years and then decide after these 20 years that you would like to extend that coverage, then you may end up needing to undergo a process to prove your insurability, and you may actually end up being denied a level of additional coverage, or you may end up needing to pay a significantly higher premium in order to renew your insurance.
Universal Life Insurance
Universal Life insurance is a type of insurance that builds upon the concept of term life insurance, adding in the missing cash component. Here, rather than simply selecting a pre specified term and putting all of your premium toward keeping the policy alive, part of the amount that you are paying in your premium is going to go into the policy's cash account. This cash account is then going to earn interest and it will accumulate on a tax deferred basis.
What are the advantages of this type of insurance?
This type of insurance is going to provide you with an extra level of flexibility. Because there is a cash component attached, you could stop making your premium payments on a temporary basis as long as the policy's cash value is capable of covering the insurance costs. You may also be able to decrease or increase your selected death benefit over a period of time. You can typically borrow against this type of policy as well in the form of a loan.
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1 comment so far ↓
You missed which could arguably be the biggest disadvantage of term insurance, opportunity cost. Since somewhere around 2% of all term policies ever pay a death benefit, there is a lot of money going to, essentially, nothing. The creates even more lost opportunity cost.
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