The Different Types of Life InsuranceA Company Can Offer
A long-standing question is the term whole life debate, but there are actually even more to consider. When you’re buying life insurance, you should have an idea of what you want the policy to do for you, and this will ultimately help you choose what type of life insurance fits your circumstance. For example, there are:
- Term Life Insurance
- Return of Premium Term Life Insurance
- Universal Life Insurance
- Guaranteed Universal Life Insurance
- Variable Universal Life Insurance
- Indexed Universal Life Insurance
- Survivorship Universal Life Insurance
- Single Premium Universal Life Insurance
- Whole Life Insurance
- Survivorship Whole Life Insurance
- and more!
- Term Life
Of course, the vast majority of people end up with a term life insurance policy, which is just a death benefit in exchange for paying a monthly premium. There is no cash value, which most of the other types do have.
A term life policy is best for those who are looking to maximize their bang-for-the-buck, especially younger applicants who are strictly looking to protect their incomes for their spouse and children. The most common bought term life policy is a 20-year term, and the average American purchases around $400,000 in coverage.
Term is also great for those seeking to protect certain assets, like a house (think of the mortgage, for example), a business (useful for satisfying SBA loan requirements, or buy-sell agreements), and other major purchases.
Return of Premium Term
A return of premium term life insurance policy is a bit of a newer type, and not quite as popular as a basic term.
It has the same basic policy features, with just a death benefit and corresponding premium, but the premium will be slightly larger. This is because, when you reach the end of your term, say, 20 years, you actually get all your money back.
Understand, though you have to reach the end of the policy or all premiums paid are forfeited.
For many, this does not tend to be a wise investment.
If you need an insurance plan to build cash value, a universal or variable life insurance contract are your best bets, depending on how much risk you are willing to take. They are also best to simply secure permanent coverage, at a lower cost. Universal life insurance policies are getting more and more common, as their utility has increased over time. However, this is also because we are in a low interest environment, where planning for the future with a cash value build-up is a little more secure.
While there are slightly more details you should understand before buying a universal contract, understand its components are much like term, with the addition of a small cash accumulation. This cash, however, only exists to offset future premiums.
Like the idea of a universal policy, but require a little more security? Enter, the guaranteed universal life insurance policy, which, as long as you maintain your premiums, will stay in force. Several companies are entering this policy into their suite of products, and many even allow you to customize the age of guarantee to help you fit your premiums into your budget.
Much like a basic universal policy, a variable life insurance policy gives you a little more control over what the cash component does for you by allowing you to invest it.
This is a bit of a more risky type of insurance, to be honest, but for someone who is young and doesn’t mind having a small portion being invested into mutual funds and other securities, it can offer an additional way to grow money in a tax-free environment.
The original type of life insurance, whole life is, literally, a policy which will cover your whole life, regardless of how old you become.
Whole life insurance policies are best for when you don’t need a large death benefit, and want a secure way to guarantee your insurance can never lapse. Whole life can also come with additional benefits, like access to policy funds (through loans), dividends (if the company offers them), and riders which may not be available with term.
For the more complex issues, like trying to use life insurance as a saving account or alternative to being limited by a Roth IRA, many of these can be used to build up cash value, all while keeping them somewhat income tax advantaged.
This also goes for using life insurance for estate planning, having more than one person on a policy, and other scenarios where term or whole policies just don’t meet the need.
The more you need from your life insurance policy, the more you need from your insurance providers, especially by way of company ratings, financial strength, and level of service they can offer you, both now and in the distant future.