Types of Life Insurance: A Guide

You may not have thought about life insurance when you were single. After all, if you don’t have a spouse, children, or any kind of dependents relying on you, it isn’t something that’s likely to come up. Once you have family members, or other dependents, relying on your income, though, you’ll likely start thinking about what would happen to them in the event of your unexpected death. It’s important to consider what kind of policy you’ll want sooner rather than later as well since it’s easier to get a higher coverage amount for a lower premium when you’re younger and in relatively good health.

While you’re likely familiar with the idea of death benefits, they aren’t necessarily the only advantage of having a life insurance policy. Naturally, the death benefit is the most important part of life insurance, and you can determine whether it’s paid to your beneficiaries in a lump sum or in installments. Depending on your type of policy, however, you may be able to use your life insurance as a form of retirement savings or as an investment vehicle. Here are the main types of life insurance and some pros and cons of each.

Term Life Insurance

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Sometimes called pure life insurance, term life insurance guarantees a death benefit to your beneficiaries if you die during an agreed-upon period of time. Once the term is over, your dependents will no longer be eligible for anything, so it’s important to choose the right term for your needs. Term policies are often signed in increments of 20 to 30 years, but you can probably find a company willing to offer renewals on a yearly basis in exchange for a higher premium.

In addition to the renewal option, you may be able to convert a term life policy into a permanent one when the term runs out. This can be a good idea if you decide you need the life insurance policy for longer than expected or if you wish to pursue a savings component since terms policies provide only a death benefit. They do tend to have the lowest premiums around, though, and can be a great choice if you just need insurance long enough to reach some other financial goals. Check for term life insurance quotes online if this sounds like a good deal.

Permanent Life Insurance

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A permanent life insurance policy guarantees a set death benefit over your whole life, as the name suggests, and it includes a savings component that can accrue cash value with tax advantages. The cash value will build at a fixed rate over time, but policyholders can choose to invest in it by paying monthly premiums ahead of time. This allows the policy to provide an extra layer of financial protection, and policy owners may choose to borrow against or make a withdrawal from their cash value when needed.

It’s important to note, however, that borrowing against your life insurance counts as a loan, and it will need to be paid back with interest. Additionally, withdrawals may eat into the death benefit, so they’re only recommended as a last resort.

Variable/Universal Life Insurance

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Universal life tries to offer the best of both worlds between permanent and term life insurance policies. Universal life insurance tends to have lower premiums compared to traditional life insurance, and it also provides a savings component. With variable life insurance, you can pay into your cash value and have it invested in subaccounts that function similarly to mutual funds. These investments mean that variable life has the highest earning potential compared to any other insurance product, but the volatility of the market means that it’s the highest risk policy as well.

Regardless of your goals, it’s generally a good idea to speak with a financial advisor before committing to a policy to ensure you understand all the coverage guidelines, exclusions, and tax rules.