While the different types of life insurance may be confusing at times to understand, life insurance is a vital part of financial and estate planning for everyone. People are often uncomfortable with the subject of life insurance since no one wants to ponder their own mortality or compare the different types of life insurance. The truth is that everyone should have protection regardless of their age. Young people with families need it to protect their loved ones from financial loss and seniors need it to cover the cost of final expenses so they don’t leave their loved ones with debts. The difference is the type of life insurance each individual needs. Below, we will discuss the pros and cons of the different types of life insurance to help you decide the best coverage for your needs.
The death benefit of a policy should be enough to allow dependents to continue in their current lifestyle. When deciding on a policy limit, consider savings and checking account balances, the income from Social Security benefits, retirement accounts such as IRAs and 401Ks, and any pensions the family would receive following an unexpected death.
Compare this income stream with the backdrop of mortgage payments, daily living and credit card expenses, medical bills, education and tuition costs, and any other liabilities you may have.
Make sure that the interest on the death benefit would provide a regular monthly income to cover any shortfall and remember to include the cost of final expenses, such as funeral costs, which can be much higher than anticipated.
Single people or individuals with no financial dependents may think they don’t need life insurance, but singles have financial obligations which could impact survivors as well. The death benefit for an individual should be enough to pay any financial obligations they might leave behind with an additional amount to cover funeral expenses.
Individuals without financial dependents still have loved ones that should not be left with an unnecessary financial burden. When buying individual life insurance, also consider the future and whether family protection may be a better choice.
Term Life Insurance
Term life insurance is the least expensive type of coverage for young, healthy individuals. It is temporary insurance which may remain in effect for 5 to 30 years. When the policy expires, it is necessary to take out a new contract which usually means completing a new application and undergoing a medical exam.
Since premiums are based on the age of the insured at the time the policy is issued, the premiums will be higher and will increase each time the policy is renewed.
Whole Life Insurance
Whole life insurance is permanent and has a fixed premium which is paid over the lifetime of the insured. This type of life insurance has a savings and investment component and builds cash value over time. Some whole life contracts may offer a single lump sum premium or a limited term premium.
Once the policy is paid up it remains in effect until the insured dies or redeems the cash value. Fixed premiums and an investment component make whole life insurance a good choice for financial planning.
Universal Life Insurance
Universal life insurance is a form of permanent coverage with an investment and savings component. This kind of coverage offers a minimum premium and payments over the minimum are diverted to the cash value. The more premium paid, the faster the cash value grows.
Cash value can also be used to pay premiums if the insured is unable to pay them due to the loss of a job or other financial emergency. Consumers with seasonal incomes may particularly appreciate the flexibility of these payments.
Variable Life Insurance
Variable life insurance is a type of universal life policy which allows the policyholder to be actively involved in determining how the money in a policy will be invested. Many variable insurance policies allow you to set up two or more investment accounts and choose stocks, bonds or mutual funds as investments. This kind is ideal for policyholders with experience in the field of investments and the desire to control their finances as much as possible.
How Are Life Insurance Rates Determined?
Rates are based on the age and health of the policyholder at the time the policy is issued. This is one reason that it is ideal for consumers to buy life insurance when they are young and rates are low and affordable. Whole life insurance is an especially good investment for younger consumers since the low fixed rates are locked in for their entire lives. Almost all policies allow you to change the death benefit if their circumstances change.
Life Insurance For Children
While most people don’t want to consider buying life insurance for children or babies, it is a great opportunity to provide the child with an investment for the future. Endowment life policies are a form of whole protection with a limited payment term which pays a lump sum of cash at the end of the term. Low cost endowment policies which have a decreasing death benefit are also an affordable method of providing children with a small nest egg.
Life Insurance For Seniors
Most seniors have fewer financial obligations and dependents than their younger counterparts, but they should still carry senior life insurance. For those who may need a small death benefit, a term policy will provide the necessary coverage for final expenses.
Seniors with larger estates may want to consider higher limits to cover estate and income taxes their heirs might be required to pay. Death benefits are not subject to taxes.
Seeking Financial Advice
While most people don’t think it is necessary to seek advice about financial planning, a financial adviser can help map out a lifetime plan to cover expenses like college and retirement. Financial planners can offer suggestions about the right type of life insurance and which family members should be insured. They can also help determine how much coverage each family member should carry to protect the family’s financial future.
Talking To An Agent
Life insurance agents can discuss different types of policies and the pros and cons of each. They are trained to assist individuals in determining how much insurance they need and how much they can comfortably afford. Some agents are paid on commission and may urge consumers to buy more coverage than is really necessary, but most are genuinely helpful.
Once a consumer has compared life insurance types, decided on the policy that best meets his or her needs and how much coverage is needed, comparison shopping with online life insurance quotes is highly recommended. The rates on similar policies can vary widely between life companies.