It’s easy to decide that you want life insurance coverage to provide for your loved ones in the event of your death.
The complicated part can be determining what kind of life insurance coverage is right for you.
But don’t worry - it doesn’t have to be confusing.
Read on to learn about the different life insurance options that are available to you and which is the best fit.
Term Life Insurance
The simplest, most popular form of life insurance, a term life insurance policy covers you for a select period of time (term). Usually ranging from 1-30 years, the policy pays out if death occurs within the outlined term.
For example, if you opt for a 30-year term, your premiums will remain fixed for the duration of the 30-year period and will pay out to your beneficiaries in the event that you pass away within that same 30-year term. When the 30-year term is up, your coverage and fixed rate expire.
Two types of term insurance include:
Level term: death benefits stay consistent for the duration of the policy term.
Decreasing term: death benefits decrease over the duration of the term policy, usually in one-year increments.
Not all term policies are rigid, some including flexibility to convert to a permanent policy during the term without requiring additional evidence of insurability.
Permanent Life Insurance
Offering lifelong death benefits, a permanent policy will pay out to your beneficiaries whether you die in ten years or a hundred. With a permanent policy, premiums are locked in and won’t increase with age or if you decline in health. But those aren’t the only benefits of choosing a permanent policy.
A permanent life insurance policy also accumulates cash value, savings that you can take a loan against or cash in by surrendering the policy prior to your death. To draw a loan from your permanent policy you aren’t subjected to any restrictions or credit checks, but the repayment plan does include interest.
There are a few different forms to choose from when purchasing a permanent life insurance policy:
Whole or Ordinary Life
The most common and straightforward type of permanent life insurance, whole life insurance coverage offers death benefit and a cash value savings account. When choosing this type of life insurance, you agree to pay a specific amount on premiums on a regular basis for a certain death benefit.
The savings will grow based on the dividends paid to you by the company.
Universal or Adjustable Life
Much more flexible than a whole life policy, the cash value of a universal life insurance policy generally earns a money market rate of interest. You typically have the option of altering premium payments once you’ve accumulated enough in your account.
Alternately, if you encounter tough times and need to reduce or stop payments, you can do that with an adjustable life policy. Be careful, though. If you stop payments and exhaust your policy savings, you could lose coverage and have your policy canceled.
Always consult your agent prior to making these types of decisions.
Combining death benefits with a savings account that can be invested in stocks, bonds, and money market mutual funds, a variable policy brings more risk but with an added possibility for a rapid increase in the value of your policy.
While underperforming investments could decrease the value of both your cash value and your benefits, some policies assure that a minimal level of death benefits will remain in place.
A variable-universal policy combines the benefits and features of universal life policy with the flexibility to adjust your death benefits and premiums.
With all of this information, how do you choose which policy is right for you?
What is Term Life Insurance?
Term life insurance is a simple and cost effective way to be sure you can provide for your family, no matter what the future holds.
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Benefits of Term Life Insurance
Obviously, cost is a factor when choosing any type of insurance. Deciding between term or permanent coverage certainly isn’t an exception.
Temporary and offering no cash value, term life insurance costs less than permanent life which accumulates cash value and lifelong coverage.
If a permanent policy is unaffordable, a term policy may be the right choice for you.
For families with children, a term policy is often a popular choice as it offers coverage for a set period of time, such as 20 years, to help provide for your young family if something were to happen to you while they are still financially dependent on you.
Benefits of Permanent Life Insurance
If you are looking for life insurance that offers accumulated cash value savings, that grows on a tax-deferred basis and you can borrow against in the future – as well as lifelong coverage – permanent life insurance may be the right fit for you.
A good choice if you have a lifelong dependent, such as a child with special needs, a permanent life policy is also ideal if you’re looking to add to your inheritance planning by utilizing your benefits to pay estate taxes or to equalize inheritance to heirs.
Permanent life insurance premiums can be significantly higher than term life insurance premiums since the insurer guarantees death benefits as long as premiums are paid and a portion of your premium goes towards the cash value component of your policy.
When it comes to life insurance there is no wrong choice, but there a choice that is best for you, your family, and your financial goals.
No one knows what the future holds. What you do know is if you were to pass away unexpectedly you would want your family to be protected against the financial burdens that come along with your death as well as the ability to continue with life as normally as possible. Life insurance can help them with both.