There are many reasons to buy life insurance. From protecting possessions, such as our home, car, and other investments to making sure that a spouse and other dependents are taken care of. Other policies can act as investments providing tax benefits and savings growth during policy holder lifetime. The right policy will help protect your loved ones so that they will not be burdened with debt when you are no longer there to care for them.
Buying life insurance can be very confusing, and understanding the different types of life insurance available will make it easier for you and your family to decide which life insurance policy is right for you. The three main types of life insurance are term life insurance, whole life insurance and universal life insurance, described here:
Term Life Insurance – this is the default type of life insurance, which is purchased and paid at regular intervals with a pre-determined termination period. When the term expires, the client must choose whether to expand the coverage to renew payments, or to throw away the coverage due to instability. Should the insured die before finishing the term, the accumulated benefits would then be paid to the beneficiary. This type of insurance is very different from all other kinds of insurance, because it only offers you a limited payment term.
In a term life policy no part of the premium goes into an investment fund it is strictly for the death benefit, so there is no cash value. Because of this, term policies are by far the cheapest form of life insurance, at least while the insured is younger. Term insurance pricing is based on age and health status.
The premiums on the term policy will remain the same for the length of the entire “term” of the policy. If you choose a 20 year guaranteed term life insurance, your premium is guaranteed for 20 years. Term pricing will increase as the insured grows older. For example, when the 30-year old male survives a 20 year term where he is paying $300 per year, a new policy to cover the next 20 years may cost $5,000- $15,000 per year. So it is important to get term life insurance coverage at a younger age to keep the cost down toward the end of the policy.
Some people prefer term life insurance to provide their families with the security they need, and then use additional funds they would have paid into a whole life or variable life policy to make investments on their own.
Permanent Life Insurance – This is an umbrella term for life insurance plans that do not expire and combine a death benefit with a savings portion. This savings portion can build a cash value – against which the policy owner can borrow funds, or in some instances, the owner can withdraw the cash value. The two main types of permanent life insurance are whole and universal life insurance policies.
Whole Life Insurance – this type of life insurance does not have a limited term, but continues on as long as the insured is still alive, hence the term “whole life”. The idea for this kind of insurance was first concocted when insurance companies were pressured to change the way term insurance policies are given. All sub-types of whole life insurance depend on the terms and agreements made between the policy holder and the insurance company. The costs involved in this type of insurance is significantly higher than term life insurance, but nevertheless it is a lot better when we look at its benefit range.
Universal Life Insurance – in this type of life insurance policy, “cash preservation” is the keyword. When payments go over the cost of insurance, the value is proportionally credited to the cash value. The cash value is then credited at regular intervals with interest. This is probably the most convenient type of insurance in terms of flexibility and the number of available benefits. In fact, this kind of insurance can even be used by the insurer, in the form of loans and cash value withdrawals. It will be up to you to decide which kind of life insurance works best for your unique situation. The right policy should cover the expenses that come with the financial stress associated with funeral and burial (and other estate expenses). Depending on the size and complexity of the estate, life insurance can create accessible cash which may be tied up in investments and accounts that are difficult to access after someone dies. The final and most significant benefit of life insurance is the peace of mind knowing that you have prepared and protected your family’s future.