There are several different types of life insurance policies available. If you understand the basics of each type, you can better select a life insurance policy that suits your needs. Some life insurance policies provide just a death benefit, while others offer a permanent, or cash value. There are pros and cons to all of these types of life insurance, so it’s a good idea to familiarize yourself with them before purchasing your policy.
Term Life Insurance
The easiest type of life insurance to understand, and the least expensive, is a “term life” policy. It has no cash value. The purpose of a term life insurance policy is to pay a specific amount to your beneficiary when you die. If you purchase a $100,000 term life insurance policy, then it will pay $100,000 to your beneficiary. The primary benefit of using a term life insurance policy is that the insurance premiums remain constant throughout the duration of the policy. If you get a 30 year life insurance policy, then your premiums will be the same for the next 30 years, even if you contract a life-threatening illness, or something else happens to your ability to buy insurability.
The “downside” of a term life policy is that you will not have anything to show for it after your policy ends. I put the word “downside” in quotes because it isn’t a downside at all. We insure our cars, homes, and even cell phones every day and never worry about not having anything to show for the premiums when the policy ends.
Special life insurance information for military members:
- Veterans’ Group Life Insurance (VGLI)
- Servicemembers Group Life Insurance (SGLI)
- How to Convert an SGLI Policy to VGLI
- How much life insurance military members need
Whole Life Insurance
A whole life insurance policy will provide a death benefit for your beneficiaries and also offers as a cash value with tax-deferred earnings. When you purchase the policy, you have a fixed premium amount which cannot increase as long as you make your agreed payments. This is why it is ideal to purchase whole life insurance when you are younger, as the premiums are less expensive than when you get older.
Many life insurance agents sell whole life insurance as an investment. You can use it as an investment, but it is almost always better to keep your investments and life insurance policies separate. Here are some things to know about a whole life insurance policy if you decide to use one as an investment:
With a whole life policy, you choose to receive dividends from your account, or to add them back to your policy to reduce your required payments. You can withdraw cash from your policy if you need to.
You cannot choose to invest in different types of accounts with your cash value from a whole life policy. The insurance company is in control of where the money is invested.
Which is better, term life insurance, or whole life insurance? Term and whole life are the two most common forms of life insurance. In most cases, people are better of choosing a term life insurance policy. The reasons for this are outlined in this article comparing term and whole life insurance. However, there are some instances when it may make sense to go with a whole life policy.
Variable Life Insurance
Like a whole life policy, the variable life insurance gives permanent protection with account flexibility and a tax-free cash value account. The amount of death benefit will vary depending on how much you earn with the cash value account, which means there are no guarantees to how much your death benefit would be when you pass away. You can also borrow money from a variable life insurance policy. Variable life insurance policies are often sold as hybrid investment products and can be complicated to understand. The benefit is that these policies may have special tax advantages.
Universal Life Insurance
Universal life insurance policies often split your premiums into a death benefit and an investment. For example, a person might start out with a $100 monthly premium of which $20 goes to the death insurance, and $80 goes toward the investment portion of the account. This gives the policy a cash value and the ability to pay out upon the death of the individual. Your beneficiaries receive a death benefit when you die, and you’ll have a tax-deferred cash value account that you can borrow from if you need to. You earn the market rate of interest on your cash accumulation, but you can’t invest your money in separate types of accounts. Universal life insurance policies offer flexibility with premiums and the face amount.
Universal Variable Life Insurance
If you’re looking for a life insurance policy that gives you control over the cash accumulation, a Universal Variable Life provides more features than other types of insurance. These types of insurance policies provide death benefits to your beneficiaries, and allows you to invest cash value into your choice of money markets, bonds, and stocks. This means the success of the earnings depends on your ability to manage the account and move money to strong investments.
Universal Variable Life also offers premium flexibility and allows policyholders to borrow money from the account or take a withdrawal. If you terminate the policy early, you receive less cash value than you would if you met the full term of the contract.
Mortgage Life Insurance
Mortgage life insurance isn’t your traditional life insurance policy – the sole purpose of this policy is to protect the lender. Here’s how it works: You take out a policy when you buy your home, and the policy will pay off your home in the event you die. This sounds great, but the downside is that your premiums often stay the same, even though the payoff benefit decreases as your mortgage principal decreases. In most cases, it is better to take out a term life policy for the amount of your mortgage, since your payoff benefit doesn’t decrease. There are times, however, when this might be a good idea. But it is generally limited to people who are not able to obtain life insurance any other way (many mortgage life insurance policies do not require an exam). Here is more info about mortgage life insurance and Veterans Mortgage Life Insurance.
Which Type of Life Insurance is Best?
As with all major financial decisions, it depends on your unique situation. The most important thing to consider is whether or not you have enough life insurance to protect your loved ones in the event you die. That is the primary purpose of life insurance – everything else is secondary. The next thing to consider is whether or not you can understand the ins and outs of the policy, and whether you have a special situation where the special tax advantages of some of these accounts come into play.
For most people with an uncomplicated situation, a term life insurance policy will be the best type of life insurance policy to buy. Term life insurance is straight forward – you pay X-amount per month and receive X-amount of coverage. At the end of your policy you can choose to open another policy, or do without.
The other life insurance policies described in this article take more work to understand and may not offer the right type of coverage for some people. If you choose to go with one of these policies, be sure you understand how the insurance policy is written, the ins and outs of any investments that are run through the policy, and any fees you will pay either directly, or indirectly through the policy (many investments held in insurance policies are notorious for having high fees). My goal isn’t to bash any type of life insurance, but rather to point you in the right direction. In most cases, individuals will be best off by purchasing a term life insurance policy. If your concern is also having an investment, then you should be able to do that through a separate investment rather than with a life insurance policy.