What Is Life Insurance?
Purchasing life insurance is one of the most important things you can do to protect your family. It can be confusing knowing which type of life insurance to buy and how much. Our aim is to demystify life insurance and explain the different types available in terms that are easy to understand. Read on for more information.
What Is Life Insurance?
Put simply, life insurance pays money to your beneficiary(s) in the event of your death. Life insurance helps pay for things like living expenses, medical bills, funeral costs, and other expenses.
Different Types of Life Insurance
There are two primary types of life insurance—term life insurance and whole life insurance. There are several sub-types of term life and whole life insurance. Let’s take a closer look.
Term Life Insurance: As the name suggests, a term life insurance policy is one that you purchase for a set amount of time—10, 20, or 30 years, for example.
One of the main advantages of term life insurance is that it’s generally more affordable than whole life insurance. If you outlive the term of your policy, you’ll need to determine whether your family has enough in savings and investments at that time to carry them through life if you were gone tomorrow. If not, you should consider purchasing another life insurance policy at the time your term life policy ends.
Subtypes of term life insurance include:
- Level Term: Your premium and death benefit won’t change for the entire length of the term.
- Decreasing Term: Your premium remains the same, but the death benefit decreases every year until it hits zero. The idea behind this type of policy is that you have steady premiums, which help you manage costs, and, although your death benefit decreases, your beneficiaries are aging and thus will need less with every passing year.
- Annual Renewable Term: The death benefit remains constant throughout the term (e.g. 20 years), but the policy renews every year, typically with an increase in premium. The premiums with this type of term plan are often less initially, but can become more expensive over time.
There are many advantages to choosing a term life policy—term life policies are straightforward and simple to understand, the premiums are generally significantly lower, they can sometimes be used to repay loans or other financial obligations, and some term life plans can be converted to cash value life insurance plans if a person’s needs change. A life insurance expert can help you understand whether a term life insurance plan is right for you.
Consumers can generally get term life insurance quotes with no medical exam required at no charge. Additionally, instant issue life insurance policies are available without a medical exam.
Whole Life Insurance:
As the name suggests, whole (or permanent) life insurance follows you throughout your life and pays a benefit to your beneficiary(s) when you die, regardless of how long you live.
Traditional whole life insurance policies have guaranteed premiums, a cash value, and the option of receiving dividends while the insured person is alive or an increased benefit after the insured person dies. The cash value (a type of savings plan) works this way: in the early years of the policy, the insurance company charges a higher premium than what’s needed to pay claims in order to keep the premium at a set rate. By law, once these overpayments reach a certain amount, they must be made available to the insured in the form of cash value should the person decide not to continue the policy.
There are several additional types of whole life insurance. They include:
- Universal Life: A whole life policy that also provides a cash value account into which part of the premium goes. Once money has accumulated in the account, the insured person may be able to use that money to reduce their premiums. One of the main advantages of a universal life policy is that you may be able stop paying the premium payments during times of hardship as long as there is enough cash value to cover the cost of the insurance. You can also borrow against the policy in the form of a loan. Universal life policy holders may also be able to increase or decrease the death benefit over time. The main disadvantage is that a universal life policy is more expensive than a term policy.
- Variable Life: Combines death protection with an investment option that allows you to invest in stocks, bonds, and money market mutual funds. While your policy value may grow more quickly, this type of policy comes with more risk, as it’s subject to market fluctuations.
Variable Universal Life: Combines the features of variable and universal life policies; you have the investment options, as well as the ability to adjust your premiums and death benefits.
How Much Life Insurance Do I Need?
To determine how much life insurance to purchase, you need to know how much your family needs each month. Don’t just guess—if you don’t already have one, you should create a financial plan. Consider the following:
- How much debt you have, aside from a mortgage
- How much you spend each month
- How much you save each month
- How much you need to retire
- How much your survivors need
The most important question is how much your survivors will need until they no longer need the earned income you’re bringing home today. If, for example, you create a financial plan and determine that by age 65 your maximum Social Security benefit plus income from investments will replace the income you and/or your spouse earn today, you’ll know that you’ll need enough life insurance to replace your earned income until you’re 65.
There are other factors to consider, including targeted investment return, the anticipated inflation rate, and the immediate cash needs of your beneficiaries in the case of your death for funeral expenses, final expenses, mortgage balance, debts, etc. The good news is that you don’t have to figure this out on your own—an expert life insurance consultant can help you determine how much you need to protect your family.
Learn more about term life insurance quotes with no exam.