Find the right type of life insurance for you.
How do you know if you need life insurance? Try asking yourself a couple of questions first. What would be the financial reality of your loved ones if you died? Would your spouse or partner be able to cover finances without your income? A recent study found that one-third of all US workers, nearly 52 million people, earn less than $15/hr. So a large segment of the population probably relies on multiple sources of income or some financial support to be able to handle expenses. If something were to happen to you, that may put your loved ones in a difficult position.
If you don’t know how your loved ones will address their needs without your income, then a life insurance policy may be right for you. But enough convincing. If you think you need to purchase a life insurance policy, then we’ve listed some common life insurance options below.
The Wyshbox Blog
- 4 common types of life insurance
- What kind of life insurance should I get?
4 common types of life insurance
Before we get into it, here’s a quick rundown of 4 common types of life insurance we’re talking about:
- Term: temporary coverage for a set amount of time
- Whole: permanent coverage, fixed payout, and payments
- Variable: permanent coverage, choice of investments
- Universal: permanent coverage, flexible payout, and payments
Term life insurance is a life insurance type that exists for a specified number of years, otherwise known as a “term.” If the policyholder dies during the term, a death benefit is paid out to the beneficiaries. But if the policyholder lives past the end of the term, they may be able to choose to renew for another term or switch coverage type, depending on the insurer.
Why do people go with term life coverage? Well, term premiums tend to be cheaper than other kinds. How much cheaper? Well, whole life insurance premiums can cost as much as 10x more than term life policies! Term life insurance tends to be better for people who want a cheaper option or to cover a short-term need, such as replacing income, or tackling rent.
Whole life insurance is a much more traditional kind of life insurance. During a whole life policy, policyholders will have fixed premiums, which means you pay the same amount each year for your coverage. When does the coverage end? If you keep paying your premiums, then you’re covered for your “whole” life (get it?).
Another aspect of whole life is that it comes with a cash value component. What does that mean? So, when you pay your premiums, a portion of that payment goes to building cash value for your policy, which can accrue tax-deferred interest. This way, you can withdraw money from the policy, you can borrow up to the cash value of the policy or use that cash to help pay your premiums. That being said, whatever you borrow, you have to put it back into your policy (preferably before you die). Otherwise, you may have lower payouts due to outstanding loans. Overall whole life insurance may be good for people who are more established and want to use their policy to work more as an investment. This way, you get that set payout, fixed premiums, and cash value, and you can use it as a source of savings.
Variable life insurance is a type of permanent life insurance (assuming premiums remain paid). Like whole life, variable life insurance comes with three main parts: death benefits, premiums, and cash value.
However, variable life insurance can come with a range of investment options for investing that cash value. The investment options can range from conservative to aggressive. Variable life insurance policyholders get to choose their investments, but whatever gains or losses happen are your responsibility.
As for the death benefit, you can choose a fixed option or the sum of a fixed amount and the cash value. So variable life insurance policies work best for people who want to be more active in using the policy for investments and stocks, rather than the passive investing of whole life insurance.
Universal is a type of permanent life insurance that, like whole and variable, comes with a death benefit, premiums, and a cash value component. So what makes universal different? For one, universal life insurance policies are more flexible than whole life. Depending on your type of plan, you may be able to raise or lower your premiums and death benefits. Interest rates play a large part here, as they may affect whether you want to raise or lower your monthly payments.
There are different types of universal life insurance, each with their own pros and cons. Looking at the bigger picture, universal life may be better for folks who want more flexibility in their insurance options. This type of insurance is generally better for people who have a number of liquid assets and long-term insurance needs. If you just need the death benefit payout, universal life insurance may not be the best option.
What kind of life insurance should you get?
The best kind of life insurance for you comes down to what you need. If you’re someone who just wants a financial obligation covered, or some income help, then term life is a nice (and cheaper) option. But if you want a set death benefit and coverage for the rest of your life, whole life is your friend. Then you have variable and universal life insurance types offering flexibility and wider investment options. Once you’ve answered those questions we posed at the beginning of this post, discuss your options with your loved ones. Get opinions, but more importantly, get educated.