Life insurance is a subject that can be tough to deal with, since it forces us to accept our own mortality. Though this is a topic that most shy away from, knowing that your loved ones will be taken care of if anything were to happen to you is essential in providing peace of mind. There are three main categories of life insurance to choose from and each has its own benefits and limitations. Knowing the differences and what each type covers is important in choosing the policy that is right for you and your family.
- Whole Life: This is probably the most straightforward of the options, but is also the most expensive. You buy the policy for a certain death benefit based on your family’s perceived needs and are charged a set premium for the rest of your life or as long as you want to keep the policy. Regardless of whether you die in three years or sixty, the death benefit remains the same and is payable as long as the policy premiums are paid. An additional feature of the whole life policy is that part of your premium is invested in a high-yield account and the accrued interest can be withdrawn at any time or used toward the policy premium in the event that you cannot pay (which acts as a safeguard to keep the policy from lapsing from non-payment).
- Universal Life: This is similar to Whole Life, but offers a bit more flexibility in the policy and how the cash value is invested. This policy allows you to increase the death benefit at any point, pending a medical exam, and also allows you to decrease the benefit in the event that premiums are too high or you need to reduce policy amount. Payment flexibility is also key; you can make the premium payments in chunks or as a lump sum amount if you so choose. This is also considered a permanent life policy, which means that the death benefit will be paid at any time as long as the premiums are paid and the policy is in force. Like the Whole Life policy, a part of the premiums are invested to build the cash value of the policy, however the markets in which these are invested are often more volatile.
- Term Life: This policy type is a less expensive product compared to the permanent policy choices. It offers coverage for a set period of time (generally 5, 10, 20, or 30 years) at a certain premium to guard against premature death. The death benefits of this policy are payable for the length of the term, but will either expire at the end of the term or the cost will be reassessed for a term extension. The lower cost of the policy allows you to pay off your debt and put aside enough money for medical bills, college tuition, and funeral costs by the end of the policy term. Unlike the permanent life policies, Term Life Policies do not build cash value, which also means that the owner loses the safeguard against a missed premium payment lapse.
There is no perfect “one size fits all” life insurance policy since every person’s situation is different. Some good things to look into are what your family will need in the event that you pass earlier than expected, how much medical or funeral bills will cost, the amount of debt you have (mortgage, loans, credit cards), and your savings plans. A good life insurance agent will be able to look at all of these factors and work with your particular situation to ensure that the needs of your family would be met in the event of your passing.