Types of Life Insurance Products
Life insurance is a more flexible product than most people think. On the market today, there is a variety of insurance policy designs that match up to very different needs. All types of life insurance have the same basic setup; you pay monthly premiums and if you die, your heirs receive a death benefit.
However, they are quite different in terms of how long they last, how much they cost, and whether they provide other benefits on top of the death benefit. Here is a complete comparison of the main types of life insurance so you can choose the best fit for your situation.
Term Life Insurance
Term life insurance is temporary life insurance coverage. When you buy a term policy, it will have a set expiration date sometime in the future. For example, it is common to see policies that last 5, 10, or 20 years. If you die during this time, your heirs receive the policy death benefit. If you outlive your policy’s term, the contract expires and you lose your insurance coverage.
Term policies are typically the least expensive type of life insurance. Since most policies expire without paying a death benefit, life insurance companies can sell these at a low price. Term insurance also only offers a death benefit; these policies don’t come with any living benefits like cash value.
Since term coverage eventually expires, these policies are best for short-term needs that won’t last your entire life. For example, a good use of term insurance would be to cover a mortgage. Eventually, you’ll pay off your home so you wouldn’t need insurance anymore.
Whole Life Insurance
As you can guess from the name, whole life insurance is designed to last your entire life. These policies do not have a set expiration date. As long as you pay your monthly insurance premium on time, you’ll keep your coverage.
These policies also commonly offer something called cash value. This is money that builds up in your policy that you can withdraw and spend while you are alive. It’s kind of like combining an investment account with your life insurance. Your monthly insurance payments build up a pool of money that the insurance company will invest and pay interest on. Whole life insurance policies offer a guaranteed rate of return so they are a very safe investment.
The downside of whole life insurance is that it is very expensive compared to term insurance. For the same amount of coverage, a whole life policy costs ten times or more per month than a term policy.
Universal Life Insurance
Universal life insurance is a mix between term and whole life insurance. With universal life, you get to choose how much money you want to pay per month for your coverage. Part of the money will go towards paying for your life insurance, basically a term policy, and the rest of the money builds cash value. The insurance company pays monthly interest to grow the cash value.
Unlike whole life, universal policies pay a variable interest rate. This means that the interest rate can change over time and isn’t guaranteed. Some years a universal policy will earn more than a whole life policy, and some years it won’t
The idea behind universal life insurance is that you overpay for your insurance when you are younger to build up a cash reserve. When you get older and insurance becomes more expensive, the cash value will make up the difference for the extra costs.
Done right, a universal life policy gives permanent insurance coverage for less money than a whole life policy. However, you need to be careful with these policies. If you don’t pay enough at the beginning, you might run out of cash value and won’t be able to afford payments later on, causing your coverage to lapse.
Guaranteed Universal Life Insurance
You can buy something called a guaranteed rider on universal life insurance. With this extra feature, the insurance company guarantees your coverage, provided you make at least a minimum monthly payment. If insurance costs go up too quickly or your cash value doesn’t grow as much as expected, it won’t matter for you. You can guarantee your policy to a certain age or for your entire life. The longer the guarantee you want though, the more your policy will cost.
Variable Life Insurance
One last type of life insurance is variable life insurance. This is another type of permanent policy that builds up cash value. The unique feature of variable life is that these policies let you invest your cash value yourself like a regular brokerage account. You’ll be able to choose between a variety of stocks, bonds, mutual funds, and money market funds for your account savings. If your investments do well, a variable policy can earn more cash value than other types of life insurance. However, if your investments don’t do well, your cash value won’t grow by much; you take on the investment risk with these plans.
If you have any more questions or want to learn more about these different products, feel free to contact us. Our staff representatives are experts in the different types of life insurance. Call now for a free consultation and to get life insurance quotes.
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