Life Insurance is typically used as a replacement of income that can support the dependants of an insured individual after that person has passed away. In addition to that primary purpose life insurance can also be used as a powerful savings vehicle as it enjoys significant tax advantages over other traditional forms of savings tools.
There are two basic types of life insurance – Temporary (Term) and Permanent (Cash Value or Whole Life). Term Insurance, if you were to compare it to other forms of temporary arrangements in life, is similar to renting an apartment for a certain period of time. Once that period or “term” expires; you either find a new place to live or pay a higher rental rate. Term insurance is the same concept, when you reach the end of the term, your insurance protection ends and there is no cash value.
Permanent or Cash Value insurance is similar to owning your own home. Whole Life premiums are larger than Term Insurance premiums, just as mortgage payments are higher than rent, but you end up with an equitable asset that has a cash value. Whole Life covers you for the rest of your life, builds cash value (like equity in home), enjoys a income and estate tax advantages and can be used for college savings, retirement or any other purpose you choose.
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