Types of Life Insurance
What does a life insurance policy do?
A life insurance policy is a contract that ensures a death benefit — a monetary sum — is paid to your chosen beneficiaries should the policyholder pass away while the policy is active. This contract is bound between you and the insurance company. The purpose of a life insurance policy is to provide financial restitution for families and loved ones of the deceased and help lessen the burden of shouldering future or upcoming expenses.
Death benefits can be leveraged for just about any expense, like funeral costs, childcare, education, household items and for paying off debt. Some types of life insurance policies also have a cash value component — separate from the death benefit — meaning that cash value accrues over the life of the policy as a percentage of every premium payment is diverted into what is essentially a savings account.
What type of life insurance policy do I need?
When you’re shopping for life insurance, one of the most critical decisions you’ll have to make is what kind of policy is best for you and your beneficiaries. Depending on what you and your family’s financial goals are for the future, there are pros and cons to each type. Careful consideration should be taken when selecting a policy type. Learn more about each type of life insurance policy below.
Term life insurance
This is the most basic level of life insurance one can buy, as it only covers the policyholder for a set number of years; the most common is a ten-year term. Term life insurance provides a death benefit only without cash value. Because of this — along with other restrictions — term life insurance tends to be the most affordable type. While premiums remain level for the duration of the policy, costs may increase dramatically in later years.
Term life insurance is best if you are: younger, on a budget and don’t need coverage for more than 15 years.
Whole life insurance
The most common type of life insurance policy, whole life insurance (also known as cash value life insurance) is a permanent form of coverage that combines a death benefit with cash value accumulations. An interest rate is set by your insurance company by which your cash value can grow over time; this can often be used to supplement retirement income. Premiums remain fixed in a whole life policy, but this type of life insurance is the most expensive.
Whole life insurance is best if you are: saving for the future or retirement, caring for lifelong dependents, have a high net worth or equity, and are interested in lifelong coverage.
Term vs. whole life insurance: what's the difference?
The key differences between term and whole life policies are the length of coverage (temporary versus permanent) and whether or not cash value accrual will complement a death benefit.
Term policies are cheaper because they do not build cash value and are shorter-term; however, while rates are fixed in the duration of the policy, once it expires and you’re up for renewal, it gets more expensive over time. Whole life policies are more expensive as cash value gives the policyholder some additional financial leeway, and the length of the policy lasts for as long as they are alive; premiums remain level from the original effective date of the policy and won’t increase over time.
Cash value life insurance
This is a term used to describe a variety of permanent life insurance products, allowing policyholders to earn cash value for the duration of their policy. With a cash value policy, money builds as you pay your premiums, and a percentage of each payment is set aside as tax-deferred money that accrues at a predetermined interest rate.
Cash value is best if you are: seeking an opportunity for a loan or investment, and you aren't overly concerned about your monthly premium costs.
Life insurance is an important protection to have, one that can go far in providing some financial security to your loved ones should the unthinkable happen.
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