Long Term Life Insurance

Long term life insurance is aptly named, as the periods of coverage provided by such policies are for an entire lifetime in most cases, or for very long periods of time, such as 20 or 30 years.  Long term life insurance tends to be more expensive than short term life insurance is initially, but as a person ages a short term life insurance policy will eventually overpass the cost of premiums for a long term life policy, as short term life insurance policies are not intended to extend coverage beyond emergency or supplemental situations.

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What Is Long Term Life Insurance

Long term life insurance is an agreement between an insurance carrier and a policy holder to provide disbursement of cash benefits to beneficiaries if the insured party should die.  In return, the insured pays a fixed, regular premium payment for the rest of their lives, and the benefits remain in effect until the policy holder passes on.  With some types of long term life insurance, such as single premium whole life, the policy holder makes one large initial payment of premium, and receives life insurance protection for the rest of their life.

Long term life insurance also acts as a savings vehicle.  Premium payments are allotted partially to fund the cost of life insurance, and partially to be accumulated as cash value.  This cash value is managed by the insurance provider, who seeks to earn a return on investments made with the money.  Returns realized are typically shared with the policy holder, and the long term life insurance policy cash value continues to grow in this manner.

The Two Types Of Long Term Life Insurance

The most widely purchased type of long term life insurance is whole life.  Whole life guarantees a fixed death benefit for life, and seeks to invest and grow the cash value of the policy accumulated by the policy holder.  Premium payments are fixed and are paid for life in most cases, and contributions of premium that build cash value are tax deferred.  The accumulated cash value can be used as a means to borrow against, to offer as collateral, to withdraw as cash, or to invest in other vehicles.  Whole life policies make safe retirement vehicles when planned over the long term, and when invested by a capable carrier in a favorable market.

Universal life insurance is another type of long term life insurance.  It functions similarly to a whole life policy in that the premiums paid are allocated to the cost of insurance and to a savings vehicle.  However, a universal life insurance policy allows a policy holder to change the amount of the premium paid, or the amount of the death benefit.  The cash value that accumulates in this type of account can be used to pay the premium on the account, or to cover shortfalls in premium payments.  This means that a policy holder can skip premium payments or pay less than the normal premium payment.

Who Should Buy Long Term Life Insurance

Long term life insurance should be purchased by anyone needing life insurance protection for life, or for greater than 20 years.  This type of insurance is especially useful to families that can afford the premium and wish to use the policy as a form of protection, and as part of a retirement and wealth transfer plan.  Young people with stable occupations can use long term life insurance as a way to build savings safely and in a tax sheltered vehicle.  Primary household income providers and child care providers should buy long term life insurance as a means of protecting family and loved ones from financial duress in the event of their death.

Long Term Compared To Short Term Life

Long term life insurance offers stability and guaranteed premiums and benefit amounts.  However, because the policy is for a very long period of time, the insurance company takes on more risk that you will die during the covered period, and so must charge more in level premiums in order to offset this risk.  In fact, long term life insurance products can be differentiated from short term life insurance products in that long term insurance policies almost always pay benefits, and short term life policies rarely pay benefits.

Long term policies also offer the added benefit of a tax sheltered savings and investment feature, as well as the ability to borrow from the policy, to withdraw from the policy, reinvest the cash value in other vehicles or ventures, or allow the policy to accumulate interest.  Long term policies have options such as the payment of only one large premium amount in exchange for lifetime benefits, as well as some disability or serious illness benefits.

Short term life insurance policies are very simple, when compared to long term policies.  Short term policies, developed to cover temporary lapses in long term life insurance coverage, are issued for a specific period of time, after which payment of premium ceases and death benefits are no longer available.  These types of policies do not build cash value, and rarely offer other benefits.  Short term life insurance is primarily purchased by people who need life insurance for a set period of time, and for the premium payments to be temporary and inexpensive.

Long Term Life Insurance Cons

One seemingly negative aspect of a long term life insurance policy is the high cost of its premiums.  However, when compared to short term life insurance, it can be seen that short term life insurance premiums increase greatly as a person ages, and will at some point be far more expensive than the level premiums of long term life insurance.  Lifetime payment of premiums can also appear burdensome to some people, but when those premiums are paid in exchange for the lifetime guarantee of death benefits that will never lapse, it suddenly seems to be a much better deal.

Long term life insurance can seem somewhat rigid, as the most common plans are inflexible in premium payment amount or the adjustability of death benefits.  However, this is why universal life was developed, and thus offers very flexible terms for many consumers.  Long term life insurance may also be viewed as expensive, when considering that a large portion of the premium goes into a savings vehicle.  Nevertheless, this was developed as a mutual method of assuring that the share of risk is spread effectively and thus more readily mitigated.  In fact, in most cases the seeming cons of a long term life insurance policy are, in actuality, benefits.

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