Purchasing life insurance could be a critical step toward ensuring financial security for your loved ones after you are gone. There are many varieties of life insurance, however, and it’s important to choose a policy that fits best with your circumstances.
It helps to break the different types of life insurance into two basic categories: term life insurance and permanent life insurance. Here’s what you need to know to choose between these two types.
Term life insurance
Buying a term life insurance means your beneficiaries will receive a set amount of money if you die within a certain number of years after buying your policy. You can generally choose a term ranging in length from five to 30 years. As long as you pay your premiums when they are due, you can be sure that the beneficiaries of your policy will receive the benefit you have selected — typically, a round number such as $500,000 — if you die during the policy’s term. If you survive through the term of your policy, then it will expire and have no value.
Term life insurance is the most straightforward and affordable type of life insurance for most people. Premiums are especially inexpensive if you’re young. That makes this type of insurance a good fit for many 20- or 30-somethings.
Check out this calculator to find out how much life insurance you need.
Permanent life insurance
A permanent life insurance policy covers you as long as you pay your premiums — up to the rest of your life, rather than for a fixed number of years.
Permanent life insurance policies also contain an investment component that allow the policy to accumulate cash value over time. If you cancel the policy, you’ll receive the cash value that has accumulated, minus any termination fees. You can also borrow money against the policy’s current cash value.
The advantages of permanent insurance — lifelong coverage and accumulating value — come at a cost. Permanent insurance tends to be more expensive and more difficult to understand.
Other types of life insurance: Convertible, universal and variable
There are other varieties of term and permanent insurance that can have significant advantages for some people. Consider looking into the following types of policies if you think they might benefit a person in your circumstances:
- Convertible term life insurance policies offer coverage for a set term, but your policy can be converted into a permanent policy without the usual medical qualifications and other requirements.
- Universal life insurance policies are permanent policies that provide greater flexibility regarding the amount of the policy’s death benefit and its premiums. For instance, you can change the death benefit more easily than you can with other types of policies.
- Variable life insurance policies use an investment component: Death benefits and cash value are based on the performance of an underlying investment portfolio. You can choose to invest your premium in an array of stocks, bonds and money market funds.
It’s important to understand the options that are available on the life insurance market, but don’t let the many choices prevent you from purchasing a policy that can help protect your family.