Life insurance provides financial security for those you leave behind after your death, whether it be paying for school or transferring wealth. However, there are different types of life insurance, some that offer a surrender value, known as whole life policies, and some that don't, called term life insurance policies.
Term Life Function
Term life insurance is only an insurance policy -- there's no investment component, which a whole life insurance policy does have. Term life insurance works kind of like a rental: you get to use it as long as you're paying the premiums, but when the term comes to an end, there's nothing left over. That makes some people consider term life insurance a waste if you don't die because you've paid the premiums and have nothing to show for it. Of course, other people recognize that even though they don't collect anything, being alive is preferable to the alternative.
Term Life Benefits
Despite the lack of a cash value, term life insurance offers other benefits. Since you don't need to worry about the cash value building up, term life is much less expensive. For example, if your main concern is that if you die in the next 20 years your children won't have enough money for college, or you want your spouse to be able to pay off the mortgage when you're gone, a term life policy can be a great solution. Plus, you can take the money you save and invest it elsewhere.
Term Life Disadvantages
The downside to term life insurance is that it only lasts for a predetermined term, such as 10, 20 or 30 years. After the term is up, there's no guarantee you'll be able to get another policy, much less another policy at the same price. So, if your term runs out when you're 60, you might not be able to afford another life insurance policy.
Whole Life Alternative
If you do want to have your insurance build cash value, you need to get a whole life insurance policy rather than a term life policy. A whole life policy costs more, but it continues as long as you continue to pay the premiums. In addition, over time you build a cash value in the policy, which you can borrow against should you need money before you die. In addition, if you ever cancel your policy, you receive the surrender value -- the cash value minus any surrender charges.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."