Are you thinking about getting life insurance? It’s a great way to help financially protect your family. Today you are going to learn How To Choose Life Insurance that suits you.
Unlike health insurance, which generally speaking pays out when you get sick, life insurance pays a tax-free cash benefit to your family or beneficiaries when you die. They can then use this money for any reason, such as covering the cost of:
- a mortgage or
- any other living expenses.
Some Americans have a life insurance policy they purchased on their own, while others have group life insurance provided to them as an employee benefit. And some choose to top up their group plans with individually purchased life insurance.
With that in mind, you must also consider that there are different types of life insurance. The big four are term life insurance, permanent life insurance, participating life insurance and universal life insurance.
But which one is right for you? To figure that out, it helps to have an understanding of what each type of insurance has to offer.
What are the principal types of life insurance?
There are two major types of life insurance—term and whole life. Whole life is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life. In 2018, 4.0 million individual life insurance policies bought were term and about 5.9 million were whole life, according to the American Council of Life Insurers.
Life insurance products for groups are different from life insurance sold to individuals. The information below focuses on life insurance sold to individuals.
Term Life Insurance
Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.
There are two basic types of term life insurance policies: level term and decreasing term.
- Level term means that the death benefit stays the same throughout the duration of the policy.
- Decreasing term means that the death benefit drops, usually in one-year increments, over the course of the policy’s term.
In 2003, virtually all (97 percent) of the term life insurance bought was level term.
For more on How To Choose Between Term Vs Whole Life Insurance, click here.
Whole life/permanent Life Insurance
Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.
In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it obviously gets very high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most people to afford life insurance at advanced ages. So the company keeps the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.
By law, when these “overpayments” reach a certain amount, they must be available to the policyholder as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.
In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product—universal life insurance and variable universal life insurance.
Reasons To Purchase Term Life Insurance
A term life insurance policy may be useful if you want coverage for a specific time frame — maybe until your kids graduate college or your mortgage is paid off. Term policies typically provide coverage for a set period, usually from 10 to 30 years. If you pass away during your policy’s term, your beneficiaries will receive the policy’s benefit. Term life insurance policies are often more affordable than permanent life insurance policies, because they only provide coverage for a designated time frame, according to the Insurance Information Institute (III).
If you’re concerned that your needs may change or you’ll eventually want permanent coverage, talk to your agent about getting a “convertible” term policy. Convertible term policies provide the opportunity to convert to a permanent life insurance policy, although it’s important to keep in mind that your premiums will likely increase with the change.
Reasons To Purchase Permanent Life Insurance
With permanent life insurance, as long as you continue to pay premiums, the policy will remain in force. Permanent life insurance may be a good choice if you want to have coverage for the rest of your life. The III says premiums typically remain the same over time.
In addition to the death benefit, permanent life insurance also provides a savings element, called cash value. Cash value may be available for you to borrow from1 or used to help pay your life insurance policy’s premiums.
Premiums for permanent life insurance tend to be higher than term policies, due to the cash value feature and the length of coverage, says the III.
Depending on the type of permanent life insurance policy you choose, additional options and benefits may be available to you. For example, with whole life insurance, the cash value typically increases at a predetermined schedule. Universal life insurance may offer the flexibility of adjustable death benefits and premium payments. A variable universal policy may offer the flexibility of universal life as well as a choice of investment options for your policy’s cash value.
Your agent can help explain the types of permanent life insurance policies so you can decide if one of them might be right for you.
How To Choose Life Insurance
In addition to choosing what type of life insurance policy you’d like to purchase, you’ll also need to determine how much coverage you’ll need. First off, it’s a good idea to plan for your policy’s benefit to cover your final expenses, including funeral costs and estate taxes, says the III. Here are some additional factors may influence how much life insurance coverage you’d like to buy:
- Your income
- Your age
- Existing debt
- Current expenses
- Future expenses, such as sending children to college
Keep in mind that how much you pay for a life insurance policy is based in part on the amount of coverage you buy (called the policy’s “face amount”). Other factors that may affect your life insurance premiums include your age and health at the time of purchase. You may be required to undergo a medical evaluation or provide detailed medical information in order to obtain life insurance coverage.
Choosing to purchase life insurance is a big decision, and it’s important to choose a policy that fits your family’s needs. If you have questions, a local agent can help you select a life insurance policy that’s right for you.