Life insurance is a rich and complicated subject that is often a source of confusion and uncertainty for many people shopping for it. Faced with an array of policy types and options, the terminology alone is a lot to manage. Furthermore, each type of life insurance has advantages and disadvantages. In this article, we define life insurance types and describe, in general terms, when each type is recommended. Let’s begin by defining the two basic types of life insurance available.
Term Life Insurance – Set it and Forget it.
Term insurance is the traditional life insurance policy that most people are familiar with. The policy pays out a certain amount—the death benefit—on the demise of the policyholder. Benefits go to a designated beneficiary who is named in the policy. True to its name, term insurance is valid for a defined period of time. If the policyholder dies during the term, the policy pays out. If not, the policy expires, and nothing further happens. You can think of term insurance like car insurance—you pay for the opportunity to be covered if you need it. But if you don’t, there is no compensation for your premiums. Most term life insurance policies are automatically extended at the end of the term so that policyholders can arrange for the policy then not think about it ever again.
Permanent Insurance – Death Benefits Plus Investment
Permanent life insurance policies were developed to allow people to have life insurance protection while also treating some of the premiums as an investment that yields a return in the future. Unlike term insurance, permanent insurance covers the policyholder throughout their lifetime, though some may expire at a certain age, typically 100 years. Premiums for this type of life insurance tend to be higher than term insurance. Making things even more interesting, permanent insurance comes in two flavors, whole life and universal life.
Whole Life Insurance – a Safety Net
Whole life insurance is characterized by fixed premiums, a predefined death benefit amount and a guaranteed investment return. This type of policy can be appealing for risk-averse people and want a stable investment that they can rely on in the future. The downside is that the stability of whole life comes at a price of significantly higher premiums than term insurance and even the other type of permanent insurance, Universal Life.
Universal Life Insurance – You’re in the Driver’s Seat
Universal life insurance is the much more flexible sibling of whole life insurance. Rather than a fixed death benefit and investment, universal insurance offers a death benefit plus an investment account that can be adjusted throughout the policyholder’s life. What people like most about these policies is the ability to control the premiums, the benefit level and the investment options as their needs as things change over time. Premiums tend to be lower for universal life than for whole life, though they are still higher than term insurance. Universal life insurance also offers some interesting tax options when withdrawing or borrowing against the cash value of the policy. We will cover these topics in a later post.
Which Type of Life Insurance Suits You?
We only scratch the surface of life insurance in this article, however, the general rule of thumb is that if you are concerned about keeping premiums down and protecting your family from loss of income, term life insurance can do that. If you prefer your life insurance to provide income opportunities in the future, and you don’t mind the higher premiums, permanent insurance is the way to go.
So, until we dive deeper into life insurance, ask an insurance professional for guidance if you are in the market. There are many factors to consider, including your stage of life and your current and expected financial position. Call us for a consultation. We’d love to explain the pros and cons and help you find the perfect policy to protect your and your family.
