At first glance, choosing the right life insurance policy might look like a complicated decision. There are so many different types of life insurance, each with varying costs, lengths of coverage, and investment value.
Thankfully, picking out a great policy is not as complicated as you may think, especially if you work with an independent life insurance broker. Although there are many different types of life insurance, most can be grouped into one of two camps: term and permanent life insurance.
Both types of life insurance can offer a significant death benefit, however, there are different terms and benefits specific to each type of life insurance that may be better suited to your needs and financial situation.
In this post, we’ll introduce the basics of term life insurance and permanent life insurance policies, and explore a few reasons why you may want to choose one over the other.
What is term life insurance?
Term life insurance policies pay out a specific death benefit to your beneficiaries if you pass away before the term expires. These term lengths are typically set to anywhere between 5 and 30 years, generally in 5-year increments. (As a side note, the death benefits your beneficiaries would receive do not count as taxable income.)
Term life insurance is one of the most straightforward types of life insurance products available. With term life, you pay a fixed premium each month for the life of the policy, and your coverage will never change or lapse as long as your payments are up to date. Term life policies are commonly purchased by younger adults who are free of health problems that typically develop later in life.
Term Life Insurance Costs
Term life insurance is one of the more affordable types of life insurance. Because there’s a relatively high possibility that the insurer will not need to pay out a death benefit before the policy lapses, insurers can sell it at a discount relative to other types of life insurance. The lower price point for term life is great for families who are living on a budget or have other financial priorities.
The premium for a term life insurance policy will generally be based on a variety of factors, including:
- Age
- Gender
- Current/past health status (in some cases, a medical exam will be required)
- Smoking habits
- Occupation
- Driving record
- Hobbies
Different Types of Term Life Insurance
The following are a few of the most popular types of term life insurance policies.
Level Term Life Insurance
This is the most basic type of plan offered. Policyholders will pay fixed premiums and receive a guaranteed death benefit for 5 to 30 years (depending on the term).
Yearly Renewable Term (YRT)
This type of policy renews each year without a medical exam. However, premiums also increase each year.
Decreasing Term Life Insurance
Policyholders pay fixed monthly premiums, however, the death benefit gradually declines.
What is permanent life insurance?
Permanent life insurance is a term used to describe any type of life insurance that has both a death benefit and a cash value component. Just like with term life insurance, if you were to pass away with a permanent life insurance policy, your beneficiaries would receive a large check from the insurance company. However, unlike term policies, permanent life insurance never expires. As long as you keep making your premium payments, the policy will remain in effect for the rest of your life.
The cash value component of a permanent life insurance plan can be one of the most compelling reasons to buy one. With a permanent life plan, a portion of every dollar you pay goes into a separate account called the cash value.
Over time, this cash value has the ability to grow and can even be invested (depending on the type of permanent life insurance policy). The cash value component of your life insurance may be used for things like paying off your house or paying for your children’s college. It can even be used to pay the premiums on the policy itself.
Permanent Life Insurance Costs
Because permanent life insurance policies never expire and have both a death benefit plus a cash value component, they are more expensive than term life policies. However, there are several different types of permanent life insurance, each with its own unique price point.
Different Types of Permanent Life Insurance
The following are a few of the most popular types of permanent life insurance policies:
Whole Life Insurance
This is the most basic form of permanent life insurance. Whole life insurance premiums and death benefits are fixed throughout the life of the policy and the cash value is set to a fixed interest rate.
Universal Life Insurance
Universal life is similar to a whole life policy but with more flexible terms for premiums and death benefits.
Variable Universal Life Insurance
This type of policy invests your cash value into mutual funds for better growth potential; however, this also makes your investment susceptible to market risks.
Indexed Universal Life Insurance
An indexed universal life insurance policy also invests your cash value, but it provides more stability by placing guardrails on how much you can lose or gain.
Which is the best type of life insurance policy?
Now that we know there are two fundamental types of life insurance, the big question is: Which one do I choose for me and my family?
As you might guess, a lot goes into making this decision. However, the best type of life insurance for you is the one that best covers three key areas of your life.
Your Immediate Needs
If you’ve recently gotten married or had children, then you’ll definitely want to get life insurance. Since both term and permanent life insurance include a death benefit, either will ensure your household is protected in the worst-case scenario.
Your Budget
One of the biggest reasons that many Americans put off buying life insurance is they see it as one more expense to worry about. For budget-conscious families, a term life insurance policy is usually the most affordable route. However, it’s important to not rule out permanent life insurance, no matter your current situation. Even though the monthly premium is typically more expensive, the earlier you start, the more affordable your payments will be. Plus, starting a permanent life insurance policy while you’re young gives the cash value portion of the plan more time to accumulate and grow.
Ultimately, the cost of life insurance is worth the peace of mind it brings to you and your family, knowing you’re covered in any situation.
Your Future Needs
Someday, when the kids have left home and you and your spouse are retired, you may start thinking that you no longer need a life insurance policy. However, after years of paying into a permanent life insurance plan, you can use the built-up cash value in a multitude of ways. You could use the money to supplement your retirement, fix up the house, or help pay for your children’s and grandchildren’s future educations. Some permanent life insurance policies can also be used to purchase long-term care to cover things like Alzheimer’s treatments and assisted living costs.
Find the Best Type of Life Insurance for You
If you’re looking for guidance on which type of life insurance policy would be best for you, the professional life insurance brokers at TDK can help. Our goal is to make you and your family feel as secure as possible with insurance that fits your life. We’re eager to help and happy to answer any questions you might have about life insurance, so contact us today!
