There are many factors to consider when purchasing life insurance. If you’ve never done it before, all the types and policy terms can be overwhelming.
Not to worry, we are here to give you a broad overview of life insurance and help you make the best decision for you and your family. We’ll start first with some overall considerations, and then we’ll move to those specific for each type.
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Term Life Insurance
Term life insurance is sometimes called pure life insurance because the policy protects your dependents in the case of your death (or in some cases, illness), but it does not carry a long-term cash value.
If you die within the term of your policy, which is often 10, 20, or 30 years, your beneficiaries will receive the payout, known as the death benefit. It is best to plan the term for life insurance to end when you no longer have children at home, you expect your house to be paid off, and you have enough money in savings for any unexpected expenses.
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Permanent Life Insurance
By contrast, permanent life insurance, also known as whole life, is slightly more challenging to understand. While the premium generally stays the same as in the case of term life insurance, permanent life insurance policies give you lifelong coverage as well as offering an investment component—the policy’s cash value.
The cash value component is tax-deferred, which means that you don’t have to pay taxes as it is earning interest. You can borrow against the account, but will have to repay the policy loans with interest. If you don’t do so, your death benefit will be reduced. You can also surrender the policy for cash, but you’ll no longer have any coverage.
While the main difference in term life insurance policies is the term, there are several different kinds of permanent life insurance.
Health Checks
Although this is not universally true, many life insurance companies will require a health exam to be aware of pre-existing conditions. For life insurance, your medical history and current physical conditions are often one of the key considerations that insurance companies take into account before writing a policy and coming up with a premium amount.
- The medical exams tend to focus on several conditions
- Elevated cholesterol, which can put you at a higher risk for a heart attack or stroke
- High blood pressure
- HIV/AIDS and hepatitis
- Hyperglycemia, which can indicate diabetes
- Nicotine usage, including e-cigarette usage
- Recreational drug use
If you really don’t want a health check, there are life insurance companies out there that will provide coverage without a medical exam. However, these policies tend to be more expensive, as you could be a greater risk to the insurer. Additionally, you may still have to answer some questions about your medical history.
Cash Value
A cash value life insurance policy tries to kill two birds with one stone by providing lifelong coverage in addition to an investment account. When you surrender the policy, meaning that you no longer need the life insurance, you will receive the cash value, or cash surrender value offered to you by the insurer. Cash value is not available for term life insurance, only for permanent life insurance options.
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Tax Benefits of Life Insurance
For either type—term or permanent, the beneficiaries generally receive the death benefit tax-free. Also, there may be some additional tax benefits for those who select permanent life insurance, these include:
Tax-deferred growth on the cash value component
Tax-free dividends on the cash value component
Tax-free cash withdrawals dependent on the policy
Tax-free policy loans
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Types
Term Life Insurance
The Good
Term life insurance is the most basic type of life insurance. If you die (or in some cases, become very ill), your beneficiaries will receive the pay out. The benefits are that premiums can be quite affordable, and you know that your family will not have to worry about financial concerns when you are gone.
The Bad
If you never have to use your life insurance policy, which is the most ideal situation, the money you paid for the premium every month is spent and cannot be recovered.
Term Length
Term length can vary, but it typically is 10, 20, or 30 years.
Amounts
You can select a wide variety of amounts of life insurance depending on your needs. Make sure that you carefully consider how much your dependents will need in the event of your death.
What’s Important to Know
Term life insurance has low premiums and will provide a designated amount to your beneficiaries in the case of your death. You do also have the option of increasing and decreasing term life insurance, which will increase or decrease your coverage and your premium to account for different life circumstances.
For example, people typically purchase decreasing policies to match the coverage of their mortgage loan so that their coverage will go down as their mortgage goes down because they just need life insurance to cover the mortgage. On the other hand, individuals will sometimes purchase increasing term life insurance if they intend to have a child in the future but do not have a child now.
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Permanent Life Insurance
The Good
You are covered for life, so you know that your family will always be protected. Some people like the cash value component of permanent life insurance because they can surrender the policy for its cash value.
The Bad
The interest rates you’ll receive on the cash value component are unlikely to be as high as what you could receive investing the money yourself in the market. In other words, the extra cost of the premium is probably not worth the cash benefit you receive.
Term Length
Your entire life is covered.
Amounts
You can get different amounts depending on the needs of your family.
What’s Important to Know
Permanent life insurance tends to be more expensive than term life insurance, but it has a cash value component and provides coverage throughout your entire life.
Other Varieties
- Universal Life Insurance: a life insurance policy that has an investment savings element and low premiums
- Variable Life Insurance: a life insurance policy that has an investment savings element that acts similar to a mutual fund
- Variable Universal Life Insurance: a life insurance policy that has an investment savings element that will pay out the death benefit as long as there is sufficient cash value to pay the costs of the insurance in the policy
- Survivorship Life Insurance: a universal life policy that protects two individuals and pays out a benefit after both die
- Simplified Issue Life Insurance: a life insurance policy with guaranteed level premiums and no need for a medical exam
- Guaranteed Issue Life Insurance: a life insurance policy that is available to any applicant regardless of current or previous health concerns
- Final Expense Insurance: a life insurance policy designed only to cover medical bills and funeral expenses when the insured passes
- Group Life Insurance: a life insurance policy in which a single contract covers an entire group of people, typically employees or a labor organization
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How to Choose the Right Policy?
You’ll need to know the needs of your family before selecting a policy. You can consider factors like the amount of coverage you required, how much you can pay a month for a premium (as this could rule out permanent life insurance), how long you need coverage, if you want a cash value component, and so forth.
Once you’ve thought about what you need from a policy, then you need to find a provider that has the right product for you, submit an application, potentially undergo a health check, and wait for approval until you are covered.
Then every year, you might consider reevaluating if the life insurance coverage that you have still best suits your family’s needs. Some companies will allow you to make adjustments like changing a term policy to a permanent life insurance policy, so remember that there is some flexibility.
Hopefully now that you’ve read this article, you have a better idea of the different types of life insurance and what is going to be best for you!