There’s a lot more to buying life insurance than most people realize. In fact, you may start to feel like the more you learn the less you know when it comes to choosing the right policy.
If you’ve decided to buy a life insurance policy, you’ll need to decide what type you want. There are two main categories of life insurance: term and permanent.
Understanding term life insurance
Term life insurance is simple, straightforward, and inexpensive. You’ll choose an amount of time that you’d like to be covered and the amount of the death benefit.
Based on your age, health status, and a few other factors, you’ll get a quote for that policy. If the terms are agreeable and the policy premiums fit into your budget, you’ll buy the insurance and choose a payment plan.
Understanding permanent life insurance
Permanent life insurance comes with many more options and is a more expensive type of life insurance. If you decide to purchase a permanent life insurance policy, you’ll have a lot of choices to make.
Whole or permanent life insurance has a cash value component in addition to a death benefit. For the first five years that you pay premiums on the policy, most of the money goes towards fees associated with owning the policy. As time goes on, the fees decrease and the amount of money deposited into the savings portion of the policy increases.
Whole life insurance may cost 4 times as much as term life insurance, even if the policies have the same death benefit amount. Whole life insurance policies remain in force as long as you make the premium payments. With a term life policy, you need to make on-time premium payments, but when the predetermined “term” is up, the policy expires.
If you pay into a whole life insurance policy until the cash value component has built up to a certain level, you have the option to surrender the policy in exchange for that lump sum of money minus taxes, interest, and fees imposed by the insurance company.
The term “permanent life insurance” covers a lot of different types of life insurance. If you decide to pursue the option of purchasing a permanent life insurance policy, here are your choices:
Universal life insurance
With this type of insurance, the policy owner can choose to adjust the death benefit amounts and premiums without having to start over with a new policy.
There’s a minimum amount of money you’ll need to pay for the policy’s premium, but you can use the built-up cash value of the policy to pay that amount if you want to. This option lets policy owners skip premium payments without losing coverage. There must be enough cash value built up in the policy to cover the payments for more than 60 days, and the policy must be more than one year old.
The interest rate on the cash value of a universal life insurance policy goes up and down with the current market interest rates. This means that when interest rates are down, you’ll pay a higher premium to offset the difference.
If you want to adjust the death benefit, you can do so but you may pay fees to decrease it and the insurance company can require you to repeat the underwriting process if you want an increase in the death benefit. This flexibility is the main advantage of universal life insurance.
Variable Life Insurance
This type of life insurance policy carries more risk. The cash value component of the account is invested in mutual funds, so they could lose money over time. The value of the life insurance policy depends heavily on the stock market.
Tax-deferred growth potential is attractive to some people, but keep in mind that you have to choose from the investment options available within the policy. Investing in stocks has risks, and so does this type of insurance policy.
Variable universal life insurance
This hybrid policy is a combination of universal life insurance and variable life insurance. Policy owners can adjust the premium amounts depending on how much cash value is inside the policy. They can also adjust the death benefit amount, subject to underwriting and fees, as they wish.
Variable universal life insurance is a more complicated option than most people want. With all the great investment options and simple, inexpensive term life insurance policies available, the average person doesn’t need to combine the two into one confusing hybrid product.
Simplified issue life insurance
This life insurance policy omits the part of underwriting that requires a health exam. To get simplified life insurance, you’ll still have to answer questions about your health. The insurance company wants to know if you are a smoker or if you’ve been diagnosed with any major illnesses.
For people with serious health problems, this type of insurance may not be the answer, though. Life insurance companies will reject high-risk applicants. They may also end up asking for a health exam anyway after reviewing the application.
If you are in good health but just don’t want to go through the hassle of underwriting, variable universal life insurance offers the advantage of a faster turnaround time. The downside is that if you are healthy enough to get approved for this type of policy, you can probably qualify for a much less expensive term life insurance policy.
Guaranteed issue life insurance
You can get this kind of life insurance policy by providing only your age, sex, and address. This policy is attractive to people who are uninsurable due to age or a health condition. You may pay as much as $200 each month for just $10,000 worth of coverage, though.
Final expense insurance
If you only want to cover funeral expenses, final expense insurance may be the way to go. You’ll pay high premiums for a small death benefit, but you’ll protect your loved ones from having to pay for burial, medical, and funeral costs associated with your death.
Group life insurance
If your employer offers free life insurance, by all means, take it. Most people change jobs many times throughout their lives, though. When you go to work for a different company, you’ll lose your life insurance coverage and your new employer may not offer it.
Even if you have coverage through work, it’s a good idea to purchase a term life insurance policy separate from your job.
Buying life insurance is an important part of your financial health. Choosing the right policy is a personal process completely dependent on your specific circumstances.
If you are curious about how much a term life insurance policy may cost, you can find out in just a few minutes, right here.
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