What’s the point of life insurance?
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Asked November 7, 2011
There are many reasons to buy life insurance. The most basic one is to pay for the cost of your funeral and other final expenses, but life insurance is also a good way to make sure that your family can reach certain goals even if you are not there yourself. Some types of life insurance policy also include the ability to make use of the accrued cash value of the policy, so life insurance is also a tax-deferred financial vehicle you can lean on if you need to.
Term life insurance is well-suited for meeting life's goals. Making sure there will be money for your kids to go to college is a popular use for term life policies, but there are also policies that are designed to pay off a mortgage, the value of the policy decreases over time to match the mortgage shrinking as it is paid off. Keep in mind that term life insurance will expire after a specific time period. Some policies can be extended beyond that period, but at a much higher premium cost.
Permanent life insurance accrues cash value that you can borrow against. The longer you have the policy, the more value it will accrue. This can be useful for making an addition to the home, putting on a new roof, or making emergency car repairs. The way it works is simple enough: A portion of each premium payment goes into an interest-bearing savings account, so the value of the cash accrual goes up faster the longer you have the policy in effect.
Buying insurance early in life will get you the best deal on life insurance. If you are in your twenties, you are less of a mortality risk than if you are in your fifties, and the premiums you pay will reflect that. Think of it this way: the premiums are lower for young people because they will have more years to pay into the policy.
Answered November 7, 2011 by Anonymous