Are you wondering what type of life insurance policy is best for you? The answer depends on a variety of factors, including how much you want the policy to pay out and how long you need it to last. Put simply; there are two major types of life insurance—term and whole life.
Term Life Insurance
Term life insurance is the most basic policy and typically the most affordable. Term life insurance provides a death benefit for a specific period, usually from 1 to 30 years and in some cases even longer. The policy’s cash value does not build up over time, meaning that if you don’t pass away within the term, the policy expires and you don’t receive a payout. There are three subtypes of term life insurance:
- Level term: the death benefit remains the same throughout the policy. Level term is the most common type of term life insurance.
- Decreasing term: the death benefit gradually decreases year-on-year over the course of the policy. However, the premium will often stay the same. Some individuals choose a decreasing term to cover the balance of their outstanding mortgage until eventually both come to an end.
- Increasing term: the death benefit gradually increases over time. This policy is typically purchased by young parents who expect their coverage needs to increase over the duration of the policy.
Whole Life Insurance
Often referred to as permanent life insurance, a whole life insurance policy provides a death benefit for your entire life and accumulates cash value over time. If your cash value account reaches a certain threshold, you can take a loan against the policy to pay for significant expenses, such as college. Whole life insurance is the most expensive but provides a guaranteed death benefit as long as you continue to pay your premiums.
There are several subtypes of whole life insurance:
- Traditional Life
The simplest form of whole life insurance is traditional life. Essentially a “set and forget” model where premiums remain the same throughout the entire policy, regardless of your age or health. It’s helpful for those who need to stick to a budget and are worried about increasing premiums as their health deteriorates with age. The cash value component of the insurance policy can build on a tax-deferred basis (e.g. your premiums will not be taxed until withdrawn, allowing your fund to compound over time). - Universal Life
Similar to traditional whole life insurance, universal policies have a death benefit and cash value component that allows your funds to grow tax-deferred. However, this type of permanent life insurance is more flexible as the policyholder has more control over how much of their premiums are funneled into the policy’s cash value component, and how much will go towards the policy’s death benefit. Just like other permanent life insurance policies, the policyholder can borrow or withdraw cash for any reason. - Variable Life
Variable policies are another form of permanent life insurance with a death benefit and cash value component. The key difference is the ability to take part in a variety of investment opportunities such as equities. Your premiums are invested into “sub-account” on behalf of your insurance company. While variable life insurance has the potential to grow your funds significantly, it’s also considered the riskier option your funds are exposed to the ups and downs of the market. However, your death benefit is also set a guaranteed minimum amount, which is usually the original amount purchased.
Other Life Insurance Policies
There are a variety of other life insurance policies designed to meet a specific needs of individual and families, including credit life insurance, joint life insurance, and indexed policies. Finding the right life insurance policy can be a challenge, but it’s also one of the most important policies to protect the ones you love.
If you need additional information regarding life insurance, Your Insurance Gal is happy to help. Feel free to give us a call today.
