Life insurance allows you to protect your dependents if you’re not around to care for them. With the right policy in place, your beneficiaries can receive protection against unexpected funeral expenses or mortgage debt that you leave behind. You could even leave enough to cover the loss of your income for a period or to put your kids through college.
Taking care of your loved ones is an easy choice. What can be a bit tougher is deciding on the right life insurance policy for you, your family, and your financial needs.
Term Life Insurance
Term life insurance is the simplest, and most popular, form of life insurance. With a term policy, you select a coverage period (term) usually ranging from one to 30 years. The policy pays if a death occurs during that specified term. If you choose a 20 year term policy, for example, your premiums remain consistent over those 20 years and benefits for your beneficiaries if death occurs during that time period. At the end of those 20 years, your coverage period is over.
There are two types of term insurance, level term and decreasing term.
- Level term: death benefits remain the same throughout the duration of the policy
- Decreasing term: death benefits reduce over the course of the term, typically in one-year increments
Some term policies are convertible; you have the right to change it into a permanent type of life insurance without additional evidence of insurability.
Permanent Life Insurance
Permanent life insurance offers lifelong death benefit protection, whether you die tomorrow, in ten years, or live to be 100. With permanent policies, you can lock in premiums and they won’t increase as you age or if your health declines. There are additional benefits to a permanent policy outside of lifelong coverage and guaranteed rates, as well.
Permanent life insurance will accumulate cash savings. You can take a loan out against it or surrender the policy before you die and collect the accumulated savings. Loans against your life insurance cash value aren’t dependent on credit checks or other restrictions, although you will need to repay it with interest.
Permanent life insurance comes in different forms:
Whole or ordinary life
Whole is the most common and straight-forward type of permanent life insurance. It offers a death benefit and a cash value savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
Universal or adjustable life
Universal policies offer more flexibility than whole life. The cash value generally earns a money market rate of interest. If you’ve accumulated enough in your account, you typically have the option of altering premium payments. If you’re in a tough economic period and need to reduce or stop payments, your adjustable life policy can help you do that. However, if you stop making premium payments and you exhaust your cash value savings your policy could be cancelled, so always speak to your agent before making these decisions.
Variable policies combines death benefits with a savings account that can be invested in stocks, bonds and money market mutual funds. This policy brings more risk, but could also increase the value of your policy may grow more quickly. If your investments do not perform well, your cash value could decrease, as could your death benefits. Some policies will, however, provide a minimum level for death benefits to fall.
Variable-universal policies combine the features and benefits of universal life policies with the flexibility to adjust your premiums and death benefits.
So how do you choose which policy is right for you?
When to Choose Term Life Insurance
Cost is often a factor in choosing term over permanent coverage. Term insurance is temporary and has no cash value, so it is less costly compared to permanent insurance, which offers cash value and lifelong coverage. You may want to choose term if permanent life insurance isn’t an affordable option.
Often times term is a popular choice for families with children. You may want a certain term of coverage, such as 20 years, to help provide for your family and children if something happened to you while they’re still young and financially dependent on you.
When to Choose Permanent Life Insurance
You may want to choose permanent life insurance if you want lifelong coverage that will pay out whether you die tomorrow or live to be 100.
You may also want to accumulate a savings element that grows on a tax-deferred basis and that you can borrow against in the future.
Permanent life benefits may be a good choice if you have a lifelong dependent, such as a child with special needs who will require care after you’re gone.
Permanent benefits can be a part of your inheritance planning; you can use the benefits to pay estate taxes or to equalize inheritances to your heirs.
You can’t always control the future. There’s no way to know when or if something could happen to you. If you have the right life insurance policy in place, however, you can control what happens after you’re gone. There’s no wrong choice when it comes to life, there is only the best choice for you and your family.