Popular Life Insurance Policies. No matter your age now is probably a good time (and not too late!) to consider purchasing life insurance. It’s an important step in financial planning, so let’s get acquainted with the two main types – term and permanent – so you can determine which is the best option for protecting your loved ones.
First, a refresher on what insurance is: When you buy a life insurance policy, you agree to pay recurring premiums. If you die while covered by your policy, your policy will pay a lump sum to the beneficiaries you’ve designated. It’s a good way to know that even if you weren’t there, working hard, your loved ones’ expenses (housing, food, medical care, tuition, and so on) would be covered. To be sure, no one wants to imagine leaving this earth, but buying life insurance can give you tremendous peace of mind.
Popular Life Insurance Types
Now that we’ve established the fundamental concept, let’s dig deeper into the two types of life insurance policies: term and permanent. Term life insurance provides coverage for a set period of time, whereas permanent life insurance covers the policyholder for the rest of his or her life as long as premiums are paid. (These policies are available in a variety of configurations. We’ll go over those with you shortly.) There is no right or wrong type; only a policy that is appropriate for you and your circumstances. Knowing which one to choose will be easier once you understand the eight different types of life insurance and the needs they are designed to meet.
Term Life Insurance
Term life insurance, as the name implies, protects a policyholder for a specified period of time. If the insured person dies within that time frame, the policy pays a death benefit to the beneficiaries. Term life insurance coverage typically lasts 5 to 30 years. All payments and death benefits are typically fixed.
A term life insurance policy may be appropriate for you for a variety of reasons. Perhaps there is a specific, limited expense that you need to be aware of. Term life insurance, for example, may make the most sense if covering the years of a mortgage or college expenses for loved ones is a priority. These policies can also benefit young people. If, for example, you took out large student loans that are now in default. Another advantage of term life insurance is that it is less expensive. If you do not require lifelong coverage, a term policy may be a better option that is less expensive.
A few variables to be aware of:
- Term life insurance can be renewed, which means that its term can be extended. According to the Insurance Information Institute, this is true “even if the insured’s health (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy.” Renewal of a term policy will almost certainly result in a premium increase, so do the math if you’re buying term insurance with the intention of “just extending it when it expires.”
- If you are okay with your coverage decreasing over time (that is, the lump sum lowering), look into decreasing term insurance.
Universal Life Insurance
Who doesn’t appreciate the ability to make their own decisions? If you like the type of protection that a permanent policy provides, there are other options to consider. Let’s take a closer look at universal life insurance, which may offer more flexibility than a whole life policy. The cash account linked to your policy typically earns interest, similar to a money market account. While that may not seem like a big deal right now, you will most likely have your life insurance for a long time, and the interest could really add up. Furthermore, as the cash value rises, you may be able to adjust your premiums.
You can apply some of the funds in your cash account to your monthly payments, which may be necessary in some cases. This type of policy is also known as adjustable life insurance because you can choose to increase the benefit (the lump sum paid to your beneficiaries) in the future if you pass a medical exam.
Variable Life Insurance
Do you have an interest in finance and keep a close eye on the market? We understand. Variable life insurance may be the best permanent policy for you. The cash value account in this case can be invested in stocks, bonds, and money market funds. This provides you with a good, diverse selection and plenty of opportunities to accelerate the growth of your funds. You will, however, have more risk this way; if you put your money in a stock that fails, you will feel it, and not in a good way. Some policies may guarantee a minimum death benefit even if the investments perform poorly.
This volatility can manifest itself in a variety of ways. If your investments are performing exceptionally well, you may be able to direct a portion of the proceeds to pay the premiums. However, if they are falling, you may need to increase your premium payment amounts to ensure that the cash value portion of the policy does not fall below the minimum.**
This type of variable life insurance policy is ideal for someone looking for a broader range of investment options for the policy’s cash value component. While returns cannot be guaranteed, a broader range of investments may provide better long-term returns than a whole life insurance policy.