With so many options and variations available, it is often hard to know what is right for you.
I’ll go over the main types of life insurance and what type of situation might benefit from it.
Term Life Insurance:
This type of life insurance is the simplest and least expensive. This type of policy will pay you a death benefit, as long as the premiums are paid, within a specific term. The term can be anywhere from 1 year to 30 years depending on the policy. It doesn’t offer any cash value and coverage will cease at the end of the term unless renewed. Premium may increase dramatically when renewed.
PROS: Inexpensive
CONS: No Cash Value, Premiums May Increase With Renewal
Best for young individuals looking for short term coverage at a low cost.
Whole Life Insurance:
This type of policy provides coverage for life as long as premiums are paid. The owner of this policy will not have to worry about higher premiums with renewal because they won’t have to renew. It also accumulates cash value. This means that part of your premium is saved within the policy and the insurance company will guarantee a minimum return on that money (ie. 3%). The cash value helps defend against inflation and is a tax-efficient investment vehicle. Whole life insurance is more expensive than term insurance because the higher mortality costs and other benefits.
PROS: Provides Lifetime Coverage, Cash Value Component
CONS: More Expensive
Best for those with steady incomes and want to be covered for the rest of their lives.
Universal Life Insurance:
This policy allows you to make flexible premium payments and the death benefit will vary accordingly. This means you can increase or decrease what you pay each month as a premium depending on how much money you have available that month or what type of death benefit you desire. Offers a cash value component that grows as determined by the interest rates. It can last for your entire life as long as the policy is properly funded.
PROS: Flexible, Cash Value
CONS: The Policy May Lapse If Not Properly Funded, A SET Death Benefit is not Guaranteed
Best for someone within inconsistent income that is looking to be covered for life.
Variable Universal Life Insurance:
This policy is very similar to the normal universal life insurance but the policy owner (not the insurance company) bears the investment risk of the cash value. This means that the insurance company is not guaranteeing a minimum return on your cash value but they allow you to have some control in what it is invested in. This policy allows for potentially higher returns on your cash value.
PROS: Higher Potential for Higher Returns
CONS: No Minimum Guarantee from the Insurance Company
Best for someone with a higher risk tolerance looking to make higher returns than the insurance company might offer.
Conclusion:
Although these are the main types of life insurance, there are numerous other variations and adjustments that can be made to each type of policy. I would advise doing in-depth research or talking to a professional to find out what is right for you and your family.