What kind of Life Insurance Policy Should you Buy?
Once again, that depends. In a nutshell, there are two broad categories of types of life insurance: term insurance and cash value life insurance. Let’s take a quick look at each type.
Benefits of term (no cash value) life insurance
If you need life insurance coverage for a fixed period of time, or if cost is an issue for you, term life insurance may fit the bill. Premiums are generally lower but the policy will only pay a death benefit to your beneficiary if you die during the time period specified in the policy.
The policy does not build additional cash value that you can borrow against during your lifetime. Term policies may be a good option for a young family that needs a lot of coverage. You can also use term life to complement a cash value policy. For example, if you are paying off a loan (business, personal, or otherwise), you might purchase a term life policy that would cover you for the duration of the loan, ensuring the loan would be repaid.
As we mentioned, term life pays only the death benefit. It does not accumulate cash value over the life of the policy that you can borrow against later. It is typically only valid for a specified term (usually five to 30 years or until age 65). If you die within the term, your beneficiary will receive the stated death benefit of the policy. There are three primary types of term life: level, decreasing, and annual renewable.
Benefits of cash value life insurance
Cash value policies are generally more expensive than term life insurance, but they include a cash value feature that lets you accumulate funds over time and you can borrow against those funds if you need them. These policies typically cover you for your entire life, not just for a specified time, provided the policy doesn't lapse for non-payment of premiums or insufficient cash values.
For people with a substantial estate or longer term coverage needs, a cash value policy may be a better option. These policies can often be a way to reduce some of the taxes on your estate after your death, and the cash value can be used to supplement retirement income. Your financial professional can assist you in determining the most appropriate course of action.
Cash value policies include a cash value feature, as the name implies, which can grow in value. They also cover you until you die, or at least until age 100, provided the policy doesn't lapse for non-payment of premium or insufficient cash values. After you've had a cash value policy a while, you may be able to borrow against it. Whole life is probably the most straightforward of the cash value varieties. Your premiums and death benefits remain the same for the life of the policy. It may even pay dividends, depending on the type you choose. Types of cash value insurance include whole life, universal life, variable life, and variable universal life.
With all cash value life insurance, at your death, any outstanding loans against the policy are paid out of and reduce the death benefit. The remainder goes to the policy's beneficiary.
A common mistake
Once you purchase your life insurance, don’t make the mistake of socking the policy away in the top of the bedroom closet…never to be seen again. As part of your normal periodic financial review, you should brush the dust off your life insurance and build that in as part of your overall financial plan. This is especially important if:
- Your family grows
- You purchase a home or business
- Your income changes
Life insurance is a way to care for your loved ones after you are gone. Learn as much as you can before you purchase a policy. This will help ensure your family and your estate have the best protection you can afford.