How to Choose From the Different Types of Life Insurance
If you’re considering buying life insurance, you may be overwhelmed by the options.
There are several life insurance types.
Each kind of policy works in its own way. Two of the most common options are term and whole life insurance.
Here are some of the more popular forms of life insurance and how they work. Understanding them will help you pick the best option for your situation.
Once you understand the policy types, you can focus on finding a good life insurance company to buy your policy from.
Major Types of Life Insurance
There are two broad categories of life insurance coverage you can usually choose from.
They include term life insurance and permanent life insurance.
Term life insurance
Term life insurance is unique. It only insures you for a certain number of years, known as the term of the life insurance policy.
You get nothing if you do not die during the term the life insurance is in effect for.
These policies often last from 10 to 30 years. The longer the policy term, the higher the insurance premiums will normally be.
Term life insurance gets more expensive as your chance of dying during the term increases. For this reason, prices go up as you get older or get diagnosed with major health conditions.
In an ideal world, you’d get term life insurance when you’re in your 20s or 30s and are healthy. Then, you’ll save or invest for your future. By the time the term life insurance policy expires, the goal is to have enough assets built up to no longer need life insurance.
For this reason, term life insurance may be a fit for young people who are diligent savers.
People who know they won’t save and grow assets during the term life insurance coverage period may be better off with another form of life insurance.
Types of Permanent Life Insurance
Permanent life insurance stays in effect for your entire life as long as you make your premium payments as scheduled and follow the policy guidelines.
Your beneficiaries should get a payout no matter how old you are when you die as long as the policy is in effect.
Most types of permanent life insurance have a cash value component. If you decide you no longer need the policy, you may be able to cash it out.
This means:
The life insurance company will pay you the cash value.
Unfortunately, the cash value is usually much less than if you had put your premiums in a savings account.
Permanent life insurance is more costly than term life insurance. Since the payout will happen as long as you keep your policy in effect when you die, insurance companies need to charge higher premiums to make more payouts.
Now:
There are several varieties of permanent life insurance. Each has their own special features.
Here are a few of the more popular versions.
Whole life insurance
Whole life insurance is one of the most basic forms of permanent life insurance.
This type of insurance normally requires you to pay premiums your whole life or until you reach a certain age.
Whole life insurance doesn’t expire as long as you keep paying your premiums and follow the policy rules.
Part of the premium helps build up a cash value. In some cases, you may be able to borrow against this cash value or cash out the policy.
When you die, your beneficiary gets paid as long as you haven’t cashed out the policy and your death qualifies for a payout.
Whole life insurance may be a good option for those who have trouble saving. It’s a forced way to save for your future beneficiaries’ needs.
That said:
The premiums are expensive. If you’re a disciplined saver or investor, buying a term life insurance policy may be a better bet. Then, you can save or invest the difference between the cost of permanent and term life insurance.
Indexed universal life insurance
Indexed universal life insurance is a more complicated version of permanent life insurance. It combines traditional permanent life insurance with an investing component option for the cash value.
Essentially, your premiums go toward the cost of insurance first. Any excess premiums paid go toward building the cash value of your policy.
The cash value of the policy may increase as an index, such as the S&P 500, rises. This is why it is called indexed universal life insurance.
Even so:
The amount it increases is based on how the policy is written. It may not increase as much as the index does. Thankfully, these policies typically prevent losses if an index decreases.
This may sound like an attractive form of insurance, but insurance should not generally be viewed as an investment.
That said:
Those who are risk-averse may find comfort in this type of policy. Even so, you’re often better off investing on your own.
Variable universal life insurance
Variable universal life insurance is another complex variety of permanent life insurance.
The cash value of these policies may be able to be invested in subaccounts.
These subaccounts invest in a variety of investments and potentially could lose or gain money based on how the policy is written.
These policies are extremely complex, so it’s often best to avoid them unless you’re intimately familiar with exactly how they work and the risks involved.
Burial life insurance
Burial life insurance is usually sold as a way to cover funeral expenses.
This type of permanent life insurance normally has a small death benefit, which may be enough to cover funeral and other final expenses.
Burial or funeral life insurance is a fancy marketing term for this type of policy. You can use any type of life insurance proceeds to pay for funeral expenses, including term life insurance. If your term life insurance expires, your beneficiaries won’t get a pay out.
The key with burial life insurance is it is a permanent life insurance policy guaranteed to pay out upon your death. This way, you’ll know your loved ones will at least have some money to put toward your final expenses.
This type of policy may be best for people who may not have other assets that can pay for these final expenses upon their death.
Guaranteed issue life insurance
Guaranteed issue life insurance means anyone can get insured. It’s guaranteed to be issued.
The best part:
This type of permanent life insurance doesn’t require any medical exams.
For this reason, insurers know people who choose this option are likely to have major health problems.
To offset this problem, you usually don’t get the death benefit if you die during the first few years.
Read the specific policy to see how your policy would work.
In exchange:
The insurance amounts are often small and the premiums are normally high to make up for the risk insurers face with this type of insurance.
You may consider this type of insurance if you can’t get health insurance elsewhere.
Think about how much money you could have if you saved the premiums in a savings account instead of paying for a policy.
How to Choose the Best Life Insurance for You
Life insurance is often a key part of proper financial planning.
Choosing the best type of life insurance for you requires you to know yourself and your goals.
Know yourself
In an ideal world, we’d all properly save and invest for our futures and our retirements.
Unfortunately, that doesn’t always happen.
Term life insurance may be better for those who know they’ll likely prepare for their future.
This way, their family members and other dependents are still covered after the term life insurance policy expires.
If you know you won’t save, permanent life insurance may be a form of forced savings. Since these policies generally don’t expire at a certain age, your beneficiaries should receive a payout.
Those who won’t have built up assets after a term policy has expired may be better off with permanent life insurance.
Know your goals
The other aspect to consider is your goals.
If you simply want enough money to cover your final expenses no matter what, a small permanent life insurance policy may be the best option.
Those who would rather use life insurance as a short-term gap coverage while they build assets to support their loved ones may be best off with term life insurance.
Shop Around
Don’t forget to shop around when purchasing life insurance.
The insurance premiums companies offer may vary depending on the insurance types, amount of coverage, term lengths as well as your personal and health information.
You can find the best policy and best rate for your situation when you rate shop across several providers.
Consult a Professional
Many of these types of life insurance policies are complex.
While the highlights are shown above, there are many more sophisticated features that should be considered.
Meet with a fee-only financial planner to help decide which is best for you. These professionals charge a flat fee for their service and don’t get paid based on commission like life insurance agents do.
By paying a fee-only professional for an opinion, you don’t have to worry that their recommendations may be swayed by the larger commissions of more expensive insurance products.
