Which Type Of Life Insurance Do You Need?
The world of life insurance can get confusing, fast. Just as important as knowing what you need is knowing what you don’t. Learning some of the basic terms could keep you safe down the line from buying something you don’t need or falling prey to a pushy salesperson without your best interest at heart.
So first, we will tackle the types of life insurance available. Do you need a term policy? Universal? Each kind comes with its own pros and cons, so below you’ll see a breakdown of the most common forms of life insurance, and what makes each one unique.
Whole life insurance provides guaranteed insurance protection for the entire life of the insured, otherwise known as permanent coverage. These policies carry a “cash value” component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. The premiums are usually level for the life of the insured and the death benefit is guaranteed for the insured’s lifetime.
As you might expect, given their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provided cash is available. This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility.
Universal life insurance, also known as flexible premium or adjustable life, is a variation of whole life insurance. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured’s needs change.
Variable life insurance is designed to combine the traditional protection and savings features of whole life insurance with the growth potential of investment funds. This type of policy is comprised of two distinct components: the general account and the separate account.
The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company’s portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name “variable life”.
One of the most commonly used policies is term life insurance. Term insurance can help protect your beneficiaries against financial loss resulting from your death; it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time. Term policies do not build cash values and the maximum term period is usually 30 years. Term policies are useful when there is a limited time needed for protection and when the dollars available for coverage are limited. The premiums for these types of policies are significantly lower than the costs for whole life. They also (initially) provide more insurance protection per dollar spent than any form of permanent policies. Unfortunately, the cost of premiums increases as the policy owner gets older and as the end of the specified term nears.
– via Investopedia
How much life insurance do you need?
Once you figure out what type of insurance you need, it’s time to make some decisions about how much coverage is right for you. There are plenty of factors that will play a part in these calculations, including your number of dependents, your income, whether you own a home, and several others.
Consider these factors:
- Your age: Premium rates generally increase with age. If you’re young, term life (covering a certain number of years) is the cost-effective way to cover your risk and keep your future life insurance options open.
- Age of spouse and children: This will help you estimate how many years of income replacement they’ll need if you were to die.
- Mortgage and debts: Wrap your home mortgage, car loans, student loans and other debts into your life insurance planning.
- College expenses: Factor in future education expenses for the kids, and possibly your spouse. Tuition and fees for four-year colleges have been increasing by up to 5.2 percent, on average.
- Your current income: If you’ve retired your debt and laid aside college funds, you may not need to replace your full income. Some advisers recommend 50 percent replacement as a starting point.
- Funeral expenses: The average cost for a funeral, burial and related expenses runs more than $7,000, while cremation costs range from $2,000 to $4,000. Don’t stick your loved ones with the final bill.
– via www.bankrate.com
Do you currently have life insurance? Based on the breakdown, which type do you think would be right for you?