This suggests that people know how important life insurance is, but fail to purchase a sufficient policy, because they don’t fully understand what they’re buying. Considering this, it’s important to explore the different types of life insurance available before investing in a new policy.
Breaking Down the Types of Life Insurance
There are 2 main types of life insurance: ”term” and ”whole life.” The Insurance Information Institute states that about 4.3 million people purchased term life insurance policies in 2016, while 6.4 million purchased whole life. There are a few important things to know about each one to determine which best suits your specific needs.
What Is Term Life Insurance?
Term life insurance is the simplest and most direct form of life insurance coverage. You purchase a policy that remains in place for a set number of years. Most policies are purchased for 30 years, though some can be as short as just a year. If you die during that time, the policy pays a single payment to the person you name as a beneficiary. Most of these insurance policies offer no other benefits and tend to be less expensive as a result.
Within the realm of term life insurance, you will hear about 2 different types. One is ”level term life insurance.” This means that during the entire time you have the policy, the benefit (paid out at the time of your death) remains the same. The second option is a ”decreasing term life insurance” policy. Over the course of this policy, the benefit is reduced slowly. Decreasing benefits diminish over time, meaning your loved ones will not receive as much if you die in year 29 of your term, versus if you died in year 5.
The benefits of term life insurance policies are numerous:
They have lower premium costs because they tend to have a limited risk to the consumer.
Term life insurance policies are easier to obtain, especially by someone who is healthy and younger.
They provide an adjustment to the amount of benefit based on what you would like to purchase.
Who will benefit from this type of policy? Term life insurance can benefit:
Those who want to cover specific debts, such as a mortgage loan.
Individuals who have dependents who only need coverage while they are minors.
Individuals who want a cost-effective policy.
Those who can purchase a term life insurance policy (or obtain one) from their employer.
People who have other forms of retirement planning in place and are not concerned with estate plans.
Before you choose this particular type of life insurance, consider the other form—whole life insurance.
What Is Whole Life Insurance?
By contrast, whole life insurance, which is also known as permanent life insurance, remains in place for the long haul. It doesn’t necessarily have an end date, as long as you continue to make payments on the policy. If you die while the policy is in place, it will provide your named beneficiary with a set amount of money.
What makes whole life confusing is that there are several forms of it. In short, you’ll want to consider what your goals are for having this policy and, then, select a type of whole life insurance that fits your needs. Here’s a look at the most common forms.
Traditional Whole Life
With traditional whole life, the premium and the amount of the benefit paid at the end of your death are designed to remain level throughout your lifetime. That means, if your costs rise by a certain amount, the debt benefit rises by the same amount. That does mean it gets a bit more expensive when you get older.
Universal or Adjustable Life
With universal or adjustable life, you have more control. You can increase the amount of the benefit if you decide to do so. There’s also a secondary component, called the savings vehicle. With each dollar you invest, a portion of those funds are likely to go into an account that earns money for you to access during your lifetime. For example, as that amount grows due to good performance in the market, you may be able to adjust your premiums to be lower as it will pull some of those funds from the account.
Variable life insurance policies offer even more investment opportunities. With them, the underlying investments can be bonds, money market accounts or stocks. There’s more risk with these policies.
Some forms of whole life insurance can work as a way for you to save for your retirement years. For example, in whole life insurance policies that offer a savings vehicle, such as variable and universal life, a portion of your payment goes toward the fees for having the account. Another portion covers the benefit. And, that third chunk goes into savings. As the value grows, you may be able to withdraw some of those funds during your retirement years. In this way, the policy works a bit more like a 401k account. It still offers a benefit at the time of death, too.
The benefits of whole life policies are numerous:
If you pass a health screening, you can purchase as much coverage as you need.
Purchasing a whole life policy at a young age can mean very cost-effective coverage for your needs over a lifetime.
They can help you to earn an investment income during your retirement—though costs and risks should still be considered by anyone choosing these policies.
Who will benefit the most from whole life insurance?
Individuals who are younger and healthy.
Those who want to purchase a policy that gives them back money during their lifetime.
Those who are looking for permanent protection.
Those who wish to leave behind the benefit for specific goals, such as funding an estate plan or covering a loved one’s college education.
It’s important to work closely with your insurance agent before making a decision about any whole life policy. Many have larger fees and can be a bit more tricky to manage because of the numerous varieties within these 3 forms.
Choosing the Best Life Insurance for You
When it comes to any form of life insurance, there are a few things to consider. First, purchasing life insurance at a young age is going to cost less than waiting to do so. For those who are looking at pricing carefully, also consider that any diagnosis of illness you’ve had could reduce your access or increase your coverage costs.
In addition, you can obtain life insurance for any specific needs you have—for example, covering your dependent children, or even using life insurance funds to care for your pet after your death. Whichever plan you pick, it is critically important to have some type of plan in place to adequately protect your family.
Work closely with your agent to talk about your individual goals and any specific must-haves for your life insurance coverage. Knowing the basics about the different types of coverage will help you in making a decision.
Learn more about the leading life insurance providers and compare their policies to find the one that will best protect you and your loved ones.