Nobody likes thinking about death, but at the same time, everyone wants to make sure their loved ones are financially secure after they have passed. Life insurance allows you to ensure everything is taken care of, so you can live the rest of your days worry-free. Check out the following overview of the basic types of life insurance and what you need to look for.
The Main Types of Life Insurance Policies
There are two main types of life insurance: permanent life insurance and term life insurance. The former covers you until the end of your life, while the latter covers you for a fixed amount of time. Term life insurance policies are typically less expensive to purchase than permanent life insurance plans. However, permanent policies are often better because they build cash value and don’t expire, as long as you pay your premiums. In contrast, term life insurance policies have no value if you outlive the contract.
Alternative Types of Life Insurance Policies
Alternative types of life insurance policies do exist, though, so spend some time finding out about these and if they fit your needs. One excellent option is a graded whole life insurance policy. It has a built-in waiting period of about two years before the life insurance payment can be received. If you die during that period, your beneficiaries will receive some pay-out. The amount will be based on the premiums you paid, with interest. And if you outlive the waiting period, your heirs will receive the full death benefit, regardless of whether you die of natural or accidental causes.
What type of life insurance policy should you get?
Term life insurance is guaranteed. That means the insurer assumes all the risk and is contractually obliged to pay the death benefit for a set premium payment. Permanent life insurance policies can be either guaranteed or non-guaranteed. It depends on how the policy is issued. If it is non-guaranteed, you assume much of the investment risk, and the insurer has the ability to increase fees. However, a non-guaranteed policy offers lower premiums and a potentially better return.
Whether you should purchase a guaranteed or non-guaranteed policy, and whether it should be a term policy, a permanent policy, or another type, depends on your specific situation. But to help you arrive at a decision, consider these questions:
- Can I pay higher premiums? Your choice may have to be based on your financial position.
- Why am I buying life insurance? If you are buying life insurance for leverage, you may prefer not to worry about the policy remaining in force.
- Should I invest my premium and grow the cash value? Some insurers offer permanent life insurance with tax-free growth of the cash value and the ability to invest in index products or mutual fund sub-accounts, and the option to take out loans against the cash value or a portion of the cash value. If those types of benefits are important to you, guaranteed insurance may not be your best option.
By carefully weighing up your options, you are sure to find the right life insurance policy for you.
