Types of Life Insurance & Which One Is Right for You
“If something were to happen to me or my spouse, who would take care of the kids?”
This is a question many parents are asking themselves, especially during these turbulent times. For single mothers and fathers, this concern is exceptionally pressing.
Life insurance is important, yet it doesn’t get as much attention as homeowner’s insurance or even car insurance. Because of this, the types of policies available can seem overwhelming and complicated. Terms like “permanent insurance” and “whole life insurance” can begin sounding like financial mumbo-jumbo.
Fortunately, it doesn’t have to be that way.
In this article, we dissect the different types of life insurance that exist. Once we cover the options, we’ll discuss the tips you need to ensure that your loved ones are protected.
So What Exactly is a Life Insurance?
A life insurance policy exists to protect your family should you pass away. That is the point of insurance: taking care of the people who matter to you, even if you are no longer around. That is the priority.
Sure, other benefits often get touted, but those take a backseat when it comes to life insurance. Savings vehicle? Investment option? No… there are better solutions for those goals. The primary reason anyone would want to get life insurance would be to protect their family financially should something tragic happen.
The topic of life insurance can be challenging to talk about, which is why it’s one of the least understood insurance types available today.
Life insurance can be used to cover:
- Funeral and burial costs
- Loss of family income
- Mortgage and personal loans
- Medical expenses or long-term care/end-of-life costs
- Child care
- Cosigned debts
- Leaving a legacy for your partner and children
Life insurance allows you to protect your beneficiaries. For most people, that is a spouse or children. For others, this can even include a nonprofit organization.
All of this brings us back to the original question: what are the types of life insurance available?
Term Insurance
As the name suggests, term insurance lasts a predetermined set of time — or “term.” The most common terms are 10, 15, 20, and 30 year periods.
This is one of the simplest types of life insurance available and is generally considered the most affordable. It pays your beneficiaries (the people you choose) only if you die during the term. Other types of life insurance, such as whole life, can last as long as you keep paying the premiums. If your term expires and you would still like to cover your beneficiaries, you typically have the option to extend it.
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The goal of term life insurance is that by the time your coverage ends, you’ll no longer need the policy. For example, by the time a 30-year policy ends, your children will be grown and earning livings of their own, no longer reliant on your income. Ideally, you will fully own your home as well, and you and your spouse will be financially secure. Check out Bestow for term life insurance rates.
Recap
- Term insurance is simple and usually the most affordable option.
- It pays your beneficiaries (people you choose) only when you die.
- The insurance is available in 10, 15, 20, and 30-year terms.
Permanent Life Insurance
Things get a little more complicated and expensive once we start talking about permanent life insurance. While term life insurance is generally straightforward, permanent life insurance tries to accomplish two goals in the same vehicle: (1) it’s trying to provide life insurance and (2) it’s trying to be a savings/investment account as well.
The investment portion is what’s called the “cash value.” This is a forced savings account within the life insurance policy (the cash comes from a part of the premium that you pay). But the cash value isn’t the only difference from term insurance.
As the name suggests, permanent life insurance never expires. This means that your beneficiaries are guaranteed to receive the death benefit, as well as whatever savings that are included in the cash value. Should you need the cash in a pinch, you can borrow against your pool, but this must get paid back.
Recap
- More complicated and expensive compared to term insurance
- Includes an investment component (“cash value”) that you can borrow against
- The policy does not expire, guaranteeing the death benefit for your beneficiaries
Whole Life Insurance
If you want insurance coverage that lasts your entire life, then whole life insurance might be considered. It is considered a permanent type of insurance, so it won’t “die” before you do. The good news is that you can lock in the premium for as long as you want the policy, so there won’t be any unexpected cost increases.
Whole life insurance has a savings component where cash can build up or get invested. The cash value portion will grow for the duration of the policy. Thus, whole life insurance is considered more expensive for less coverage, as part of the premium is going towards the cash value and not the policy itself.
Recap
- Whole life insurance will last as long as you live.
- It promises that premium payments will remain consistent and that the death benefit won’t decrease.
- There is a guaranteed minimum rate of return on the cash portion of the account.
Variable Universal Life Insurance
Like whole life insurance, variable universal life insurance offers lifelong protection and a cash value portion of the account, which can get invested. The difference? You must decide how the cash portion of your account is going to get invested in the market. Because the choice is in your hands, you now bear the risk of the investment. The insurance policy will not guarantee a return on the cash portion.
If the cash portion of the account begins yielding negative returns, then there’s the possibility that you will need to remit higher premium payments to cover the loss and rebuild the cash value. You can withdraw cash or borrow funds from the account, but these must get paid back. Also, it’s important to note that many policies have a baseline cash level. If the cash value falls below that level, the premium may increase to prevent the policy from lapsing.
That said, variable universal life insurance is often considered one of the worst options available. There are high management fees, and the “variable” premium payments, which are largely dependent on the cash value, carry a lot of risk. And don’t forget: you’re already carrying the risk for the cash value of the account!
Recap
- Variable universal life insurance includes both an insurance policy and cash value.
- You are responsible for how the cash value is invested, which means you bear the investment risk.
- There are no cash value guarantees.
- This is often considered the worst option available.
Universal Life
Universal life insurance is also known as “adjustable life insurance.” As the alternative name suggests, this insurance type offers more flexibility. The monthly premium covers both (1) life insurance and (2) savings and investment. What makes this different from other options with a cash value is that the insurance offers an adjustable premium.
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Once the money is in the account, you can increase or reduce your death benefit (up to certain limits depending on the policy you buy). Increasing your death benefit generally means higher premiums, and lowering the death benefit generally means lower premiums. A parent whose children are growing and beginning to work, for example, might seek to decrease the benefit. There is also the option to use whatever funds are in the cash value to pay the premium.
Recap
- There is a defined benefit and cash value.
- Premiums can be adjusted, depending on your coverage needs.
- Ability to access cash value to adjust the amount paid for your premium.
- Costly fees
Which Life Insurance Option is Right for Me?
Just because you have children doesn’t mean that life insurance is the best solution for you or your family.
It’s best to speak with a licensed professional who truly has your best interest at heart, and isn’t merely trying to sell you something for commission.
Many of the “benefits” of life insurance policies, such as the cash value, can be accomplished through an Emergency Savings account. Some people call this the “rainy day fund.” Simply set aside a portion of your paycheck each month to prepare for unexpected expenses. It’s best to keep this money in low-risk savings vehicles to ensure the money is there when you need it.
Still, there’s always an option to add a rider to your existing term policy for an affordable rate. This covers your children until they leave the household.
For more information, feel free to watch my Instagram Live on the topic below:
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