Types of life insurance

You may have thought about life insurance, but aren’t necessarily sure where to begin. While a simple search can turn up many different options, it’s not as complex as it may initially appear to be. Determining what kind of life insurance is right for you begins with knowing your options.

Term and Permanent Life Insurance

There are essentially two basic types of insurance: term and permanent. For many people, it’s not one versus the other, but rather a combination of the two which may be the best fit. Term life insurance is an agreement that spans a specific period of time. However, a permanent policy is an agreement which can span your entire life.

Choosing Term Life Insurance

The simplest type of life insurance is term insurance. You pay your premiums on a regular schedule, and in return, your insurer agrees to pay a death benefit should you die during that term. Term policies are commonly purchased for 10, 20 or 30 years in length. However, if you live beyond the end of the term, your policy may expire, and you (or your beneficiaries) will not be entitled to any payment.

Term life insurance is typically a lower cost option, since – unlike permanent insurance – there is the possibility you could outlive the coverage and not receive the death benefit. It allows you to purchase large amounts of coverage for comparatively small premiums. This often makes it a great choice for families on a budget that still want the ability to protect their goals until retirement. It’s also an option frequently used to pay off a large debt with an end date, such as a mortgage or higher education costs, if you pass away.

Although these policies have a specific time limit, most can be renewed or extended for an increased premium, relative to your age. Additionally, most term policies may be converted to a permanent policy if your needs evolve during the policy term.

When to Choose Permanent Life Insurance

Permanent life insurance is designed to provide lifetime coverage, and includes several different types of policies, including the most common: whole life insurance and universal life insurance.

While permanent life insurance is initially more expensive than term insurance for the same amount of coverage, it provides some extra benefits and flexibility that term insurance does not. In addition to providing lifetime coverage, permanent insurance offers benefits you can take advantage of while you are still living, such as accruing “cash value.” The cash value of a permanent life insurance account is a tax-deferred savings account you can borrow or withdraw funds from to help with emergencies, education costs, home improvements, or let grow to help supplement your retirement.

Whole life insurance is a form of permanent life insurance that offers a level premium and a fixed death benefit, but combines coverage with savings. A traditional whole life policy requires that premiums are paid regularly until you reach 100 years of age. However, there are some whole life policies with a limited payment period, and the premium is fully paid within a specific number of years. Your cash value grows with each premium payment, and the insurer may pay dividends based on the company's financial performance. Dividends may be paid out in cash, accumulate at a competitive interest rate, used to purchase additional insurance within the policy, or to reduce the premium. Dividends are not necessarily guaranteed, but the possibility of these earnings are an attractive feature of whole life policies.

Universal life insurance is another common type of permanent life insurance. It’s often referred to as adjustable life insurance because it offers more flexibility than a traditional whole life policy. While part of the premium pays the death benefit and part accrues cash value, a universal life policy lets you increase or decrease your death benefit and pay premiums in almost any amount. If you need more coverage, you may increase it (sometimes subject to a medical exam). If you want to save money, you can reduce your premium payment or use your cash value to pay the premium. The flexibility to adjust coverage amounts without surrendering your policy is an attractive benefit of universal life insurance policies.

What Type of Life Insurance is Right for You?

The life insurance options that are right for you will vary based on a number of factors. A skilled financial professional can help you examine your family and financial situations, as well as your risk appetite and need for flexibility, in order to help you select the coverage that is right for you.

Your needs are also likely to change throughout your life, such as getting married, buying a house, and having children. So it’s important to meet with one of our financial professional to ensure your life insurance coverage keeps pace with these changes and continues to protect what’s important to you.

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