Sep 19, 2017
What Kind of Life insurance Should I Choose?
The many types of life insurance are overwhelming. The broad range of life insurance choices shouldn’t keep you from getting sufficient coverage. Here’s what you need to know about the most commonly purchased policies.
1. Term insurance
This basic form of life insurance is often the cheapest option for those under age 50. Term policies are drawn up for a certain amount of years, usually up to 10 years. They are renewable at the term’s end, but as the insured ages, the premiums will increase with each renewal.
There are several variations of term insurance.
First, in a level term policy, the annual premium will be locked at a set amount for up to 40 years, depending on the insured’s age. Next, a declining balance term policy is often used as a mortgage insurance. It’s created to match the amortization schedule of the insured’s mortgage principal. The premium is constant, but the face value, or the policy’s death payout, declines throughout the term. Once the mortgage balance is paid up, the policy expires. A third takeoff of term insurance is a return of premium term policy. This policy repays all your premium payments if you outlive your insurance’s term.
One major caveat of term insurance is that the policies have no cash value; they are pure insurance. Benefits are only paid if the policyholder passes on during the policy’s term.
2. Whole life insurance
Whole life insurance offers protection coupled with a cash value component. Premium payments are locked in at a level rate as long as the insured is consistent with payments. A portion of the premium goes toward increasing the policy’s cash value. As the cash value grows, the insured can borrow money against it, up to 90% of the policy’s entire cash value, tax-free.
Remember, though, that outstanding loans will accrue interest, reduce the policy’s death benefit and increase the odds of a policy lapse.
3. Universal life insurance
Universal life policies offer high flexibility. Premiums can fluctuate or even be deferred within certain limits. Cash values can be withdrawn, though this directly decreases the death benefit. Face values can be modified as well.
4. Variable life insurance
Variable life insurance promises fixed premiums and investment options for the risk-takers. The policyholder’s cash value will be invested in the insured’s choice of stock, bond or money market portfolio. Cash values and death benefits will fluctuate along with the investments’ performance.
Death benefits generally have a floor, but cash values offer no guarantees; investing them means risking a significant loss. These policies usually have higher fees than universal life insurance. However, any cash value accumulation can grow tax-free.
5. Universal variable life insurance
This policy offers investment options, along with flexible premiums and the ability to modify face values.