There are two kinds of life insurance policies: term and permanent. Term policies last for a specified amount of time and expire after that time elapses. Permanent policies, such as whole or universal life insurance policies, last for the duration of the policyholder’s life.
Term vs. Permanent Life Insurance Policies
|How long it lasts||1 to 40 years||The life of the insured|
|Includes cash value?||No||Yes|
|Fixed benefit amount?||Yes||Sometimes|
A cash value in life insurance means that a portion of your payments goes toward a savings or investment account which can later be drawn from to pay for major expenditures. The savings can sometimes be used to pay the policy’s premiums, too.
For some types of life insurance, the benefit that is paid out in the event of the insured’s passing is a set amount that is chosen when purchasing the policy. However, some policies allow you to change the benefit amount during the course of the policy.
Types of Life Insurance Policies
Term Life Insurance
Term life insurance policies are only in effect for 1 to 40 years, depending on the term purchased. If the insured dies within the term, the beneficiaries are paid the death benefit. However, if the insured outlives the term, they will no longer be eligible to receive the death benefit.
Some policies may be able to be renewed at a higher premium, and term life insurance policies cost significantly less than permanent life insurance policies. However, the premiums only pay for the death benefit itself; there is no savings or cash value element to term life insurance policies.
Term Life Insurance Policies Are Best For:
- Anyone looking for 1-40 years of affordable coverage.
- Older people.
- Those with serious preexisting conditions.
- Anyone who does not have a lot of expendable income to spend on a life insurance policy.
Whole Life Insurance
Whole life insurance policies are permanent life insurance policies that last for the life of the policyholder. They include a death benefit and a cash value component, which is a tax-deferred savings account that accrues interest at a set rate. A portion of each premium goes toward the savings account.
Whole life insurance policies are sometimes called a “forced savings vehicle” because they allow people to save for retirement while simply paying their life insurance premiums. The savings can be withdrawn or used as a loan against yourself to cover anything from mortgage down payments to college tuition. However, whole life insurance policies are significantly more expensive than term life policies.
Whole Life Insurance Policies Are Best For:
- Those with a high net worth or a high current income.
- People who struggle to save consistently.
- Anyone concerned about their ability to save for retirement.
- Those who may need the cash value to cover future costs like estate taxes or expenses for long-term dependents.
Universal Life Insurance
Universal life insurance is a permanent life insurance policy that lasts for the life of the policyholder. Universal life insurance policies are similar to whole life insurance policies in that they feature a cash value component that allows people to save for retirement while simply paying their life insurance premiums.
However, with a universal life insurance policy, premiums and death benefit amounts can be changed without needing to purchase a new policy. Additionally, the cash value accrues interest based on a variable rate determined by the insurer, and the saved cash value can even be used to pay for the policy’s premiums.
Universal Life Insurance Policies Are Best For:
- Those with a high net worth.
- People who want to easily accumulate savings.
- People who are concerned about their ability to save for retirement.
- Those who are unsure about how much coverage they will need and want the flexibility to change benefit amounts and premium payments over the course of their life.
Final Expense Insurance
Final expense insurance is a type of life insurance policy that specifically covers the costs related to your death, including final medical expenses and funeral or burial costs.
Final Expense Insurance Is Best For:
- Older people who do not have other types of life insurance coverage and who do not have the savings to cover their end-of-life expenses.
- Those with older parents who do not already have life insurance.
- Anyone concerned about funeral and medical costs.
Who Needs Life Insurance?
- Everyone who has dependents.
- Parents with young children or children with special needs.
- Adults who own property together.
- Young adults who want to lock in low rates.
- Families who do not expect to be able to afford funeral and burial expenses.
- Wealthy families who expect to owe estate taxes.
- Seniors who want to leave money to their adult children.
- Those with preexisting conditions like cancer or diabetes.
In general, if anyone relies on you financially or if your family may struggle to afford the costs associated with a funeral, life insurance can help make sure some of the financial burden is taken care of in the event of your passing. Additionally, if you share expensive assets, such as a house, with another adult, life insurance can prevent them from being unable to afford that asset without you. The death benefit can even be used as an inheritance for children, to pay off any accrued debts, or to handle estate taxes.
On the other hand, if you have no dependents and your funeral expenses will not hurt anyone’s finances, you may be able to skip life insurance. This is especially true if you have a robust savings account or investments that can help your family manage the costs associated with your passing.
Life Insurance Tips
1. Be honest when filling out your life insurance application.
Your insurer will review your answers, and any discrepancies between your answers and what is discovered through your medical exam, medical history, or insurance history could cause your policy to be cancelled or make it more difficult to find a policy in the future. Life insurance companies report information to the Medical Information Bureau, and if you lie on an application, that may be seen by any future insurer you try to buy a policy from.
2. Take your debts into account when determining your coverage amount.
The standard guideline is to purchase a coverage amount that is 10 times your annual income, so your family has a nest egg to rely on. However, if you have a large mortgage or other debts, remember to make sure those are considered and can be covered by your policy.
3. Compare quotes.
Like with any type of insurance policy, comparing quotes from several insurers will help you make sure you’re getting the best deal available.
4. Independent brokers and financial advisors can help with the decision.
Since there are so many factors to consider when deciding on a life insurance policy, speaking to a life insurance agent or independent broker can help you get the facts straight.