What is life insurance? How does it work? In this article, you’ll learn more about the major types of life insurance policies you can opt-in for.
It’s not only your life on the line – your loved ones’ lives, too. That’s why it’s essential to be fully informed about the various types of life insurance available before deciding.
Although there are great benefits of life insurance, there are a few factors to consider when choosing the right type of life insurance.
First, what are your goals for coverage? Are you looking for financial stability in the event of your death? What is your budget?
Related: What is insurance? How does it work?
3 Major Types of Life Insurance Policies
There are three major types of life insurance policies: term, whole life, and universal life.
Term Life Insurance
This is the most common type of life insurance, and it pays out a monthly benefit for as long as you are alive.
The coverage typically lasts anywhere from 10 to 30 years but can be longer if you select a longer-term policy.
Term life insurance is typically cheaper than other types of life insurance, but it doesn’t provide financial protection if you die before the policy expires.
Term life insurance policies have a set duration, usually ten years or less, and then the policy pays out the premiums you’ve paid.
Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy.
However, many providers – will allow you to convert a term policy to permanent life insurance for part or all of the coverage period.
If you receive term life insurance through an employer, rates are typically issued “on attained age,” which means the rates will increase over time.
Whole Life Insurance
A whole life policy is the simplest form of permanent life insurance, providing coverage that lasts your entire life.
Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash-value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.
Compared to other forms of permanent coverage, a whole life policy has three defining characteristics:
- The level premium remains the same for life
- The death benefit is guaranteed as long as the guaranteed premiums are paid
- The policy includes guaranteed cash values that grow at a guaranteed rate
Universal Life Insurance
Another type of permanent insurance that provides the same advantages of cash value accumulation and continuous protection throughout one’s life is known as universal life insurance.
However, there is a significant distinction when compared to whole life insurance: the rates are flexible.
You have the flexibility to adjust the amount of money you pay into a universal policy according to your needs and preferences, as long as you stay within the parameters of the policy.
If you pay less each month, you may find that you have to pay a greater total sum in later years in order to maintain your health insurance coverage.
This form of policy may adapt to the changes that occur in your life while yet delivering the same kind of rise in cash value as whole-life policies do.
The decision to have another child, change jobs, or take out a loan to buy a business are all examples of potential scenarios in which it would be beneficial to have both financial stability and the ability to adapt to changing circumstances.
This type of policy is great if you want some financial protection in case you die soon but don’t want the worry of having an unknown amount of money coming your way each month if you live a long time.
Pros and Cons of Each Type of Life Insurance
Universal life insurance is generally considered the safer option because it provides a fixed payout no matter how old you are when one dies.
However, it may not be the best choice for people who want to retire early or want to keep their finances relatively untouched in the event of their death.
Whole life insurance is more expensive than universal life insurance but provides a higher payout if you die before the policy expires.
Whole-life policies typically have higher initial premiums than universal policies, but they also provide a higher payout in the event of death.
If you want to buy a whole life policy, shop around and compare rates. You may also be able to get a better deal on a universal policy if you qualify for a discount based on your age or other factors.
If you’re unsure which type of life insurance is right for you, speak.
Personal Accident Insurance
Every day, we are faced with the possibility of an accident. Whether it’s slipping on a wet surface or hitting a pothole, accidents happen and can cause serious injuries. Over one-third of all fatalities in the United States are due to accidents.
Personal accident insurance can help cover the costs of medical expenses, lost wages, and funeral expenses in the event of an accident.
Several types of private accident insurance are available, each with specific benefits and drawbacks.
Types of Insurance (Summary)
Term life insurance provides a stream of payouts for a set period, typically 10 or 20 years.
Whole life insurance is designed to provide ongoing cash payments to the policyholder throughout their lifetime, regardless of how long they live.
Universal life insurance pays out a specific death benefit irrespective of the age or health of the policyholder at the time of death.
When considering life insurance, it’s essential to understand the different types of policies available.
