Life Insurance – Which Type Suits You BestPolicy Types
Life insurance is an important way to provide for your loved ones after your death. It pays for the expenses for your funeral and burial, guarantees an inheritance for your beneficiaries and pays off debts. Although many people view life insurance as a good investment, they find the different types confusing. So, which type of life insurance suits you best?
What is life insurance?
Life insurance is a contractual arrangement where you make regular payments to a life insurance company so that in the event of your death, the insurance company pays a prearranged amount of money to your beneficiaries.
A 2020 poll revealed that only 57% of all American households have a life insurance policy. You may feel that choosing an insurance policy is confusing and overwhelming. Here are the different types of life insurance for you to consider.
Today, there are two fundamental types of life insurance:
- Term life insurance
- Whole life insurance
What is term life insurance
Term life insurance is popular. You purchase this life insurance for a certain length of time, if you die during that time, the insurance company pays your beneficiaries the full amount you invested. If you don’t die, the policy ends and you lose the money you invested.
Term insurance is a good policy for single earners in a household. Often, banks require you to have term insurance before they’ll give you a loan to buy a house. The loan is typically equal to the amount of the term insurance so that if you die, your beneficiaries can pay off the loan debt right away. Term insurance is good for a fixed amount of time, for instance, until your children finish their education.
Typically, a term life insurance policy should be three to five times your yearly income. If you make fifty thousand dollars per year, your insurance will pay $150,000 to $250,000. It’s best to fix the term policy for as long as possible.
How much you will pay depends upon how much coverage you want, but you’ll pay less if you’re healthy. Those who have a dangerous lifestyle or job will pay more. You’ll also pay more if you smoke. Life insurance companies often require a health checkup for their applicants.
What is whole life insurance?
As the name implies, whole life insurance is paid into for your entire life, even if you live to be 99 years old. After you die, your beneficiaries receive benefits. Within whole life insurance, there are three different types of insurance.
- Traditional whole life insurance
- Universal whole life insurance
- Variable universal life
Traditional whole life insurance
In traditional whole life insurance, the premium level stays the same. When the policyholder is young, the payments can be higher. In this way, the insurance company keeps the premium levels the same, but they can invest the money paid back into the company. When these “overpayments” as they’re called, add up to a certain level, you can borrow on or sell for face value. This is risky since it decreases your policy’s value and you risk your policy expiring, or getting hit with a tax bill if the policy ends prior to death.
Universal life insurance
This life insurance is like traditional whole life insurance, but it provides more benefits to the policyholder. When your policy reaches a certain cash value, you can regulate your payments choosing when and how much you pay. But you will need to be sure your premiums don’t decrease because that will lower your benefits if you die suddenly.
Variable life insurance
Variable life insurance is comparable to whole life insurance, but you can decide how your cash is invested. Of course, if the investments aren’t doing well, the cash value of your policy will go down affecting the death benefits for your loved ones if you die.
Endowment life insurance
This type of life insurance is a good choice if you want to leave money to your beneficiaries plus save money for when you’re older. This type of life insurance is losing its popularity, but it does have some benefits. One advantage is that you’ll receive the full amount of money you invested if you live beyond the policy’s limit. One disadvantage of this type of life insurance is that your money earned will be taxable.
What is capital life insurance?
This life insurance not only pays your beneficiaries when you die, but also allows you to accumulate capital. You provide for your loved ones saving money at the same time. These funds are payable in a lump sum when the policy ends.
What is joint life insurance
If you’re married and want to provide coverage for your spouse or partner in case of your death, you might consider joint life insurance. This type of policy is more economical than two separate plans, especially if at least one of you is in good health and younger than the other.
Unmarried couples may want to have separate insurance policies and establish one another as the beneficiary. Term and whole life insurance provide an option for joint life insurance policies.
Overall benefits of life insurance
Life insurance gives you the peace of mind that you’re providing for your loved ones when you die. There are also other advantages to life insurance. Here is a list of just a few of the benefits.
- Affordable-Life insurance is very economical, it accommodates most incomes. When you first get your policy, the premiums can be low, especially if you don’t have beneficiaries who will need your support. Good life insurance covers you as long as you need it, this way you’re not overpaying for something you don’t need.
- Helps your family- Life insurance protects your family from financial disaster. Many people find themselves covering the debts of their loved ones because they didn’t have life insurance. This is often the case of older people whose term insurance ends, but they decide to not invest in another life insurance policy.
- Part of your financial plan- Perhaps you’ve made efforts to invest in your retirement and you’ve carefully saved your money, but have you skipped buying insurance even though it’s a great investment for you and your family? What would happen if you suddenly died? All your hard work and savings could be wasted on paying off debt.
How to choose a policy
It’s always a good idea to shop around for a life insurance plan since costs will vary depending upon the provider you choose. Usually, you want to set up a policy with reduced premiums over time, say, for instance, there are fewer dependents at home. When you look for an insurer, pay attention to the premiums and any changes that occur, especially for long-term life insurance.
Life insurance dos and don’ts
Like any big decision in life, you will need to carefully consider what to do and not do when it comes to life insurance. Here are some suggested dos and don’ts of life insurance.
- Don’t buy more than you really need- If you set term life insurance and whole insurance side by side, you’ll realize that you get the same coverage, but you’ll pay a lot more per year for your whole life insurance. Ask yourself if you need a life long policy right now or would term insurance that lasts you twenty years work just as well?Plus, it is tempting to drop your insurance plan with the high premiums when you’re in a financial slump, but if you have a modest policy, you’ll be likely to keep your life insurance.
- Avoid schemes-Don’t fall for insurance schemes that offer a simple fix kind of insurance. Purchase a life insurance policy that pays all the value promised from the time you sign up.
- Avoid unfair assessments- Be sure you choose a life insurance policy that fits your situation fairly. If you have a health issue, some insurance companies will raise your premiums beyond what they should be. Health issues are weighteddifferently by different companies. Consult with a qualified agent who can help you make a good choice.
- Updated paying process- Search around for an insurance company that allows automatic premium payments. This takes the worry out of forgetting to pay your insurance bills.
Life insurance is a good choice for many reasons. It assures you that your loved ones will be provided for and won’tbe left with overwhelming debt and other financial problems. It can also be a good investment for you in the long run if you choose an insurance that allows investments, loans or borrowing on the cash value of your insurance.
Before you choose insurance, shop around so you don’t purchase more insurance than you need or don’t get the best coverage for your situation. Take your time researching life insurance, and if you get stuck, get the help of an experienced agent or financial counselor. Life insurance should be part of your life to guarantee a good future for you and your family.