Losing a loved one unexpectedly is never easy. It is painful and emotionally devastating. It can also be financially devastating if you are the sole provider for your family. Even if they have other means of income, death can still take a huge financial toll if you are not properly insured. Choosing the right type of life insurance policy can make the difficult months following your death a little easier for those left trying to pick up the pieces and carry on. That is why it is so important to choose the right policy for you and your family.
What Is Life Insurance?
Life insurance is a financial contract made between two parties: the policy holder and the insurer. The policy holder typically pays a certain amount of money on a regular basis, although certain policies simply require one lump payment made at the beginning of the contract. In exchange, the insurer agrees to pay monetary benefits to designated beneficiaries upon the death of the policy holder. Benefits may include money for the insured’s funeral expenses, payments for the beneficiaries’ living expenses or even tuition payments for dependents. Certain types of policies may also qualify the beneficiaries to receive payments upon life altering events such as including critical injuries or terminal illness. Following is a guide to the various types of life insurance to choose from.
Whole Life Insurance
Whole life insurance is a type of permanent insurance that combines an investment product with a life insurance policy for a flat rate. It provides the policy holder with a lifetime death benefit, but also gives them some financial freedom. Young adults can expect to pay more money than they would for temporary insurance such as term insurance, but the premium does not increase with age as it does with term insurance. For this reason, the long term cost of whole life insurance is roughly that same as other types. One of the reasons that people choose a whole life policy is that the policy holder is typically entitled to use of a cash value reserve. If you find yourself the victim of a layoff, a costly divorce or are going through another sort of economic hardship, you can take a loan out against the policy and the income is tax free. If you have any unpaid loans upon your death, that amount will be subtracted from the death benefits before payment is made to your beneficiaries.
The advantages to this type of policy are:
- Guaranteed cash value
- Predictable premium payments
- Ability to take out loans
- Expense charges do not reduce value of policy
- Optional riders available to increase death benefit
- Inflexible premiums
- Lower return on investment than other savings alternatives
Term Life Insurance
Term life insurance is perhaps the most well-known type of life insurance. The policy holder pays a premium for a specified period of time; policies are typically written in five year increments ranging anywhere from 5 to 35 years. You can select the length of the policy based on your short term needs. For example, mortgage policies are available with a death benefit in the amount of your unpaid mortgage. The premium may remain level or it may increase with age, depending on the policy. The policy does not accumulate cash value over regardless of the length of the contract or the price of the premium. Instead, a face amount is defined in the contract and will either remain constant or decline over the course of the contract.
Advantages of term life insurance include:
- Affordable alternative to permanent policies
- Customizable to your short term needs
- Ability to invest your savings wherever you choose
- Does not accumulate cash value
- Face amount may decline over time
Universal Life Insurance
One of the newest life insurance products on the market is universal life insurance. This type of policy combines the best of both term and whole life policies. Policy holders will enjoy greater flexibility with premium payments and well as the potential for the growth of cash values. Premiums will increase the cash value, but charges assessed by the insurance company can also reduce the cash value.
Advantages of universal life insurance include:
- Flexible premiums and death benefits
- Interest paid at a specified rate
- Growth of cash value is tax deferred
- Premium can be paid from accumulated cash value
- Ability to take out loans
- More expensive than other types of insurance
- Reduced guarantees
- Interest rates are conservative
Variable Universal Life Insurance
Variable universal life insurance is essentially the same as universal life insurance with one exception: the interest is not paid at a specified rate. Instead, the cash value will vary depending on what investment sub-accounts the policy holder chooses.
The primary advantage of variable universal life insurance:
- Ability to invest savings where you choose
- More expensive
- Investment losses my lead to higher premiums or no death benefit
What Policy Is Right For You?
Ultimately, your decision will be based on your budget as well as your short term needs. Take the time to compare products and choose that product that will offer the greatest financial protection for your loved ones.