You might consider purchasing life insurance for a number of reasons. One of the first considerations in your pursuit of the right policy is understanding the various types and how each relates to your situation.
Life insurance policies fall under two broad categories: term and permanent. With a term policy, you purchase a death benefit amount and determine how long you want to hold the policy; it pays out a death benefit if the owner passes away during the specified term. Permanent insurance policies, in addition to providing a death benefit, feature a cash value account that, over time, builds up a balance you can access.
While a term life policy offers a death benefit only during the selected term, a permanent life policy provides a death benefit that covers your entire life, as long as you keep paying the premiums. Neither term nor permanent life insurance death proceeds are subject to the beneficiary’s income tax, but they may be subject to federal estate taxes.
It’s worth mentioning that older life policies, generally prior to 2001, may actually mature when the policy owner turns 100 and will pay out the face value of the policy — which is taxable to the extent it exceeds the sum of after-tax premiums paid into the policy — while he or she is still alive. Newer policies, generally after 2001, extend to a maximum age of 121. 1
“What type of life insurance is best for you depends on a variety of factors, including how long you want the policy to last and how much you want to pay.” 2 [Read more…]