Life insurance is pretty simple, isn’t it? You buy a policy. And when you die (yep, we said it), the people you named as beneficiaries get the benefit. But What Life Insurance Do I Need? knowing what policy is right for you and the people you love isn’t so simple.
Life insurance comes in two basic categories: term and permanent (also known as whole life). Each kind provides important protection, but key differences exist. Another important consideration is how much life insurance to have. Be sure to consider your family’s needs, consult a financial adviser, and discuss your options with a licensed and qualified insurance agent before making your own personal decisions on the policy that will work for you.
What Life Insurance Do I Need?
There are two main types of life insurance: term life insurance and permanent life insurance.
1: Term life insurance
Term life insurance is typically the more simple and affordable option. It provides coverage for a set period of time or “term,” typically 10-30 years, and is designed to protect your dependents during your income-earning years. If you pass away during the term period, your beneficiaries will receive a lump-sum payment of the policy proceeds.
As one example, many parents choose to have term insurance to protect their family during the time they are raising their children. If the parent passes away within that specified term (say, a 20-year period), the beneficiaries receive the amount for which the parent was insured. However, if the parent does not die within that specified period, the life insurance policy expires when the term does.
In the family case above, the premise is that once the term ends and the children are adults, they will no longer need to rely on their parents for financial support. As a result, it is not important to have parental life insurance beyond that critical period.
However, family circumstances or today’s economic uncertainties may make some parents think twice about a term policy alone. Two examples: Parents might fear that their children will graduate college with high student debt and will continue to need financial assistance. If the term insurance has ended and the parent then dies, the support will immediately end. Or perhaps the family includes a child or an adult sibling with a chronic life-threatening medical condition or other challenges and will always need support.
For some people, the lower premiums and specific time frame for coverage of term life insurance presents an ideal mix. Other people, however, prefer the additional benefits and peace of mind provided by a permanent life insurance policy.
2: Permanent life insurance
Permanent life insurance, which includes whole life insurance, provides coverage for your entire life. Some permanent life insurance policies let you access cash value with a policy loan, a withdrawal, or a partial surrender from the policy. Withdrawals, partial surrenders, and outstanding loans will usually reduce the amount paid to beneficiaries.
A main benefit of permanent insurance is that it can build tax-free cash value over the decades. When you pass away, your beneficiaries will receive the accrued payout, and can use it for whatever purpose they wish, without having to pay taxes on that money. They may use it to pay for the parent’s funeral expenses, pay off college debt, make a down payment on a house, or any other financial need.
Another benefit of permanent life insurance is the ability to withdraw (borrow) some of the cash value of the benefit amount. However, you have to be sure to pay it back, or the death benefit will be reduced to cover the withdrawal. Additional types of permanent life insurance, with a variety of other benefits, include universal life, adjustable life, variable life and variable-universal life. Your insurance agent can help you decipher the options.
Term life insurance might be right for you, particularly if:
- You need coverage to replace your income over a fixed period of time (like when you’re raising children or paying off a mortgage)
- You want the most affordable coverage which provides insurance for a specific period of time (like while you are working and saving for retirement)
- You want a streamlined and straightforward process to quickly provide your family with protection when they need it most (like while you are a wage earner, covering household expenses)
Guaranteed issue whole life insurance might be right for you, particularly if:
- You’re between the ages of 65 and 85
- You want a simple process without medical exams or lab tests
- You thought you couldn’t get life insurance because of your age or health
- You want your policy to build cash value
- You want coverage for the rest of your life
- You don’t want your family to have to worry about your final expenses
- You’re willing to pay a higher premium for the unique benefits of this coverage
The Decision Is Yours— Just Be Sure To Make It
Ultimately, of course, the decision is all yours as to which type (or types) of life insurance you need. Some people even decide to have a mix of term and permanent policies. Consider your family’s needs, check in with your financial advisor, and talk to your agent to help you decide which options will serve you best.
Deciding on life insurance is a long-term decision with the potential for immediate and lasting impact. The sooner you make the decision, the sooner the policy will be put into place, the sooner you will have peace of mind knowing your family will be taken care of in the event of the unthinkable.