Buying a life insurance policy pays your loved ones when you die. It ensures financial protection in case anything happens to you.
No one likes to think about dying. However, to build a secure financial future, a life insurance policy adds strength to your plan.
What kind of life insurance policy is best for you?
Types of life insurance policies
Life insurance falls into two broad categories: term life and permanent life.
Term life insurance
Term life insurance is also known as temporary life insurance. It’s the simplest, most straightforward way to ensure you provide coverage for your family. It’s sold based on a finite duration, typically 10 to 35 years.
People usually purchase term life insurance based on specific needs. You have more risk to protect against today than you will at some point down the road. This is often the case when parents want extra protection while their kids are young and at home. Once grown and become adults, financial plans may change, rendering a life insurance policy no longer necessary.
In most cases, people outlive their term policies. Nonetheless, it’s a good tool to have in your financial plan for controlling risk beyond your control.
Term life insurance comes in both level and non-level terms.
- Level term – provides the same coverage and the same payment throughout the life of the policy.
- Non-level term – the insurance policy is set up to either increase premium payments or decrease death benefits over the duration of the policy. This is usually done to counter specific risks, such as a mortgage.
Premium payments can change dramatically based on terms. Be sure to look at various policies to get one that best suits your needs.
Permanent life insurance
Two types of policies fall under the permanent life insurance umbrella: whole and universal. Permanent life insurance isn’t set up to carry you through specific events. Instead, it’s a policy designed to cover you for life.
Many prefer adding a permanent life insurance policy to their financial plan because of the security it offers. You won’t have to worry about qualifying for coverage as you age, and you’ll always be able to count on it as inheritance funding as you continue to build up your estate.
People also use permanent life insurance as a savings or investment plan, with a portion of the insurance premium going toward the cash value. This is a tax-free way to increase your savings. When you die, your beneficiaries will receive the death benefit minus any withdrawals or unpaid loans taken out against the policy.
Permanent life has several different terms in which to invest:
Whole life insurance
Whole life insurance policies work well for people who choose to lock in a rate for life, then rely on it as inheritance money. Whole life coverage remains the same as long as you continue to pay into the policy. Your cash value continues to collect in a savings account. While you can rely on it as a savings account, if you’re looking for it as an investment strategy, there may be better options.
Universal life insurance
Universal life insurance policies provide a permanent policy with the flexibility of changing it on the fly. With this policy, you determine how much goes into the cash value of the policy and how much is applied to the death benefit. Be aware of this split if you rely on it as an inheritance payout. Universal policies also come with a maturity date. Once you reach a certain age – usually 95, 100, or 121 – the life insurance will cash out and pay you a lump sum. This ends your life insurance coverage.
Variable life insurance
Variable life insurance policies are for people looking for more investment diversification. Like a whole life policy, it offers lifetime insurance coverage. But it’s more flexible in how you, the insurer, invest the cash value. The cash value won’t sit in a savings account. You have several investment options to choose from, which can help you build a larger nest egg. Realize that it also amplifies your risk if some of your investment choices don’t perform well.
What’s the best insurance policy for you?
With so many different policies, which one should you choose? There isn’t one right or wrong answer.
A neighbor may prefer a term policy to provide coverage for their young, growing family. It’s insurance to provide support if something happens to one of the spouses while their family is young.
A friend may prefer a whole life policy to add to their estate. They are building a well-rounded financial plan and will use it for inheritance funding.
What’s best for you depends on your needs, goals, and desires. Start with a bit of research. Explore more options and use them to narrow your choices. You can get a few quotes to do some comparison shopping.