Life can be unpredictable. Without any warning, you can face tragedies and mishaps. Whether that is a severe illness, injury, or other permanent disabilities, or premature death, unforeseen events can occur at any time. That is why every individual must remain prepared for the unexpected at all times. One such way is to purchase insurance to ensure that you are financially secure to battle any financial hardship in life.
Among all the different types of insurances available in today’s market, one critical one is life insurance. It is a contract signed by the insurance company and the policy owner that guarantees a sum of money or death benefit to the client’s beneficiaries upon their death in return for regular premiums.
Types of Life Insurance
There are two main types of life insurance policies. Choosing the right one for your needs renders it crucial to know the difference between them.
Term Life Insurance
As the name implies, this type of life insurance provides coverage for a certain period after which it ends. You can choose a term ranging from 10, 20, 30, or even 40 years. If you outlive, the coverage expires without any benefits payout.
Term life insurance is cheaper as it does not accrue cash value. You can continue coverage if you outlive your term but at higher premiums. Three types of term life insurance balance the affordability of the policy with long-term strength. They are as follows:
Decreasing term life insurance– Coverage decreases over the life of the policy at a predetermined rate;
Convertible term life insurance– This is pretty self-explanatory. It allows clients to convert a term policy into a permanent insurance policy; and
Renewable term life insurance – This is an annually renewable term life insurance policy. The period can be as short as a year.
Permanent Life Insurance
This kind of life insurance remains active for the client’s entire life until they stop paying the insurance premiums, surrender the policy, or pass away. The two main types of permanent life insurance policies are:
Whole life insurance – This kind of life insurance accumulates cash value, allowing the client to use the cash value or funds for various purposes during their lifetime, including supplementing retirement income or paying for college tuition.
Universal life Insurance – The cash value earned via this life insurance also earns interest on top of it. The premiums are also much more flexible as you can adjust your death benefit
Choosing the Right Life Insurance Policy
Before concluding what kind of life insurance policy you should get, it is vital to assess your financial capabilities and requirements. The right insurance policy for you will depend on your current financial situation and the financial obligations you may want to cover to support your loved ones who rely on you financially to fulfill their needs. Accordingly, your goals and expectations about what you want to achieve with a life insurance plan will accurately determine the amount of coverage you need.
Consult an independent insurance broker to make a proper insurance analysis and get a quote for life insurance. That can help you obtain the financial security you need for your family’s future. It will ensure you get adequate coverage without paying extra and not remain underinsured at the same time.
Some insurance agents may argue that whole-life insurance policies are much better as you can build up tax-free cash flows to borrow and keep the policy throughout your life. That may be true, but the reality is that most people who need life insurance, especially those who are young in good health, should opt for term insurance policies. One of the main reasons is the cost of it.
Permanent life insurance policies take up commissions and sky-high fees. The worst part is that if you decide to surrender your policy, the charge for that is high as well. That would leave you with little to no cash value eventually.
Choose Term Life When:
- You require insurance only for a specific period, as the policy allows you to match the length of your requirement. Take, for example, the fact that you might have children, and you want to make sure that you will have enough to pay up when the time comes for them to go to college. In such a case, you might opt for a twenty-year term life insurance.
- You want a large amount of insurance but are tight on your budget and want to save money.
- If you feel your financial capabilities may change over time, you can opt for a convertible life insurance policy. That allows you to switch to permanent coverage in the future.
Choose Permanent Life Insurance When:
- You are not afraid of paying higher premiums and want life insurance that remains in force your entire life. That way, your beneficiaries will get a death benefit whether you die tomorrow or if you live to be over a hundred years. You can not outlive permanent life insurance as long as you pay your premiums on time.
- You want to use insurance as an investment tool and accumulate a tax-free cash value that you can tap into during your lifetime.
- You want to take the guesswork out of paying premiums as it requires you to pay a fixed rate your entire life.
Choosing a Life Insurance Company
If you are unsure which company to opt for for your life insurance, then keep in mind that you should not choose the company simply because of their initial price quotes. Though the price is an essential determining factor when buying life insurance, note that you may get a much higher final quote after receiving your personal information and assessing your situation.
Hence, get in touch with several companies to have a backup option in case one firm ends up giving a high final quote. Your best bet would be to opt for well-reputed companies that are financially strong and have high claims-paying ability.
While term life and permanent insurance are two different tools, their primary purpose is the same- to protect your family from any adverse financial consequences that may arise from loss of income and maintain their standard of living after you die. After your demise, your loved ones can use the payouts from either policy to cover funeral costs, pay the mortgage, pay college tuition, and other expenses.
Ultimately, your choice of life insurance will boil down to your long-term financial security goals. Speaking with a knowledgeable financial advisor can help you determine the right life insurance policy for your present needs and circumstances.