Which Life Insurance Types Should You Choose?

Meta: Here are a few things about different life insurance types that are available on the market right now. Let’s find out what you and your family really need.


Introduction

There are two main types of life insurances which are term life insurance and permanent life insurance. Generally speaking, term life insurance is the contract that provides financial protection for a limited time, while permanent life insurance lasts forever for the policyholder.
Here are a few things about different life insurance types that are available on the market right now.

1. Term Life Insurance

Providing protection up to 20-30 years or even more, term life insurance is the most common contract that can compensate for missed potential income during working years. Since it provides death benefit assurance without any cash value accumulation as long as the insured is alive, it is pretty affordable and suitable for young, healthy individuals.
Once the death benefit comes in effect, the predetermined amount of money of up to millions based on one’s needs will go to the beneficiaries that were already chosen in the contract by the insured. Therefore, your loved ones can move on with their goal without shouldering all the burden of funeral bills and taxes.

Types of Term Life Insurance

Based on your needs and goals, here are some types of term life insurance you can choose to find the most suitable one that most benefits you and your family:
  • Increasing Term Life Insurance: As the name suggests, this is the type of coverage of which the death benefit increases over time. This policy is for those who can afford it and desire more coverage.
  • Decreasing Term Life Insurance: This term life insurance will have its death benefit decrease over time with the premium unchanged. As the mortgage balance decreases annually, the death benefit will also decrease. Therefore, you would want to choose this type of insurance if your aim is to cover the unpaid mortgage balance.
  • Level Term Life Insurance: The death benefit stays fixed the entire term for this type of policy. The same rule applies for the premium.
  • Renew Annually Term Life Insurance: For this policy, the premium will increase every year while the death benefit remains unchanged.

Pros and Cons of Term Life Insurance

Pros:

  • Offers a wide variety of options for those with definite necessity, ability, and purpose. For example, you can a 20-year policy instead of a longer policy that costs more expensive when you have small children or need to save money for mortgages. 
  • The most affordable life insurance
  • Not complicated to understand

Cons:

Cash value does not grow over time and the restricted amount of time can also be a disadvantage. For example, if you chose a 20-year contract and no events have occurred during that amount of time but you want to prolong the contract, then you might be rejected any coverage or required to renew at a premium that is considerably greater than before based on your condition.

2. Permanent Life Insurance

Different from term life insurance, permanent life insurance provides both the death benefit and the cash value that lasts for the insured’s whole life as long as the premium is paid for. Like the term life insurance, there are also many options for you to choose from in the permanent life insurance.

a) Universal Life Insurance

Universal life insurance is versatile and enables you to change the death benefit as time passes. A portion of the premium will be deposited into a cash value account in which money accumulates with interest and can be withdrawn to pay for necessary fees. Due to the long-term effect, universal life insurances are much more expensive than term life ones.
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Individuals who choose to pay for this life insurance type are seeking to secure assets for beneficiaries by planning estate strategies. On the other hand, universal life insurance is also used to replace income when you will not work for the rest of your life.

Different from term life insurance, universal life insurance is complex since the death benefit is uncertain. Depending on the market interest rates, the premiums and death benefits will shift continuously instead of staying at a fixed amount.

Universal life insurance is divided into two smaller groups:

Guaranteed Universal Life Insurance

Guaranteed universal life insurance offers fixed death benefits and payments without much cash value in the policy. If you don’t have enough money paid punctually, the policy will be obligated to be forfeited. This life insurance type can be very risky in cases you need emergency funds for financial or health problems.

Pros:

  • Cheaper than other universal life insurances
  • You can decide on a certain age that you want the death benefit

Cons:

  • You’ll lose your payments and forfeit the policy if you don’t pay the insurer in time. 
  • Small cash value
Indexed Universal Life Insurance
In indexed universal life insurance, your cash value account is connected to a stock market. Therefore, your earnings are measured by a formula set in the policy.

Pros:

  • Offers access to cash value
  • If the stock market moves positively, so does your gains
  • Flexible payments and death benefits

Cons:

  • Cash values don’t make the most out of the stock market’s movements.
b) Variable Life Insurance
This is a type of permanent life insurance that offers death benefit and cash value. But instead of restricting the cash value, the policy’s holder has the ability to invest in other options. This way, the policyholder can raise funds based on market changes that are invested in accounts that are managed by insurance companies. Although the death benefit may vary, it will not go below the guaranteed amount according to the policy initially.

Pros:

  • As long as you can afford the premium, your death benefit is guaranteed.
  • You have better control over cash value by investing in other investments. Better chances for larger gains!

Cons:

  • You’re at financial risk when you make hasty investments and the market goes against you. 
  • The investments that are offered to you in the might cost more than others.

c) Variable Universal Life Insurance

Variable universal life insurance is like a combination of variable and universal life insurance. Compared to universal life insurance, variable universal life insurance has only one difference that you won’t be gaining any interest rates in cash value amounts, but you will be investing those funds into other equities. In short, you would have more control over your cash value and earn more from it.

d) Whole Life Insurance

Whole life insurance is a type of permanent life insurance that can cover you throughout your life with fixed premium and death benefit. It is often applied to young children since the premium would cost less. Regardless of your condition, you’ll still pay the same amount of premium and gain a fixed death benefit in a whole life insurance.

Pros:

  • Covers you for life
  • Avoids great financial risks, keeps funds in the budget
  • Cash value grows without tax

Cons:

Cash value grow slowly
Costlier than term and universal life insurances
Inflexible, you cannot change your premium or death benefit

3. Other Life Insurance Types for Specific Situations

a) Survivorship Life Insurance

Survivorship life insurance is a life insurance that covers for more than one person. The death benefit will go to the second person after the first person has passed away. This type of life insurance will cost more than a term or permanent life insurance but will most likely be cheaper than a couple of life insurances.

b) Final Expense Life Insurance

Final expense life insurance is often purchased by older people that cover for funeral funds. This type of insurance is for those who don’t want their loved ones to be burdened mentally and financially by funeral expenses such as burial, flowers and memorial services that can cost up to $10,000. Final expense life insurances can be either term or permanent, and the premium is usually not excessive.

c) Joint Life Insurance

Usually purchased by parents with children so that there are beneficiaries. When a person dies, the insurance will cover the other person and the policy will then be expired. When both people die, the insurance will cover for their children so that they can pay for necessary bills and keep their rightful fortunes.

d) Others

  • Accidental Death and Dismemberment: Death benefit is triggered when you die in an accident or when you lose your limbs, sight, hearing, etc.
  • Mortgage Life Insurance: Cover for mortgage and pay the lender when you die.
  • Credit Life Insurance: Pays off a certain loan when you die.

Conclusion

In order to pick out the best-suited life insurance, you should have an insight into your own conditions then consult a broker or a financial advisor. As there are countless of life insurance types out there, being informed helps you make right decisions not only for yourself but also for your family.


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