Quite often, most people start to think about life insurance or assurance after a loved one suddenly passes on.
By 2020, only 54% of Americans had life insurance. The Covid-19 pandemic brought with it the realization that life can be taken away anytime, so the need to prepare adequately for that eventuality.
With this in mind, what's the best type of life insurance? Keep reading to discover the available types of life insurance to help you identify the optimal choice for you.
Life insurance policies are classified into:
As the name suggests, term insurance is a type of life insurance policy that provides coverage over a specified period or term.
It's typically the easiest and probably the cheapest plan you can purchase. The period can range from 10-30 years or more.
This means that if you outlive the term, the policy will halt, and no money will be paid to your beneficiaries.
When choosing this policy, there are things to keep in mind;
There are several types of term insurance which you can choose depending on your needs and budget.
This type of term life insurance allows you to renew the policy without underwriting.
Normally, the policy is renewed if the policyholder gets ill and there's a need to adjust the premiums to match your age. It's important to note that premiums payable increase with age.
This type of term life insurance allows you to trade your temporary coverage for a permanent one. You can convert your coverage to enjoy more benefits and meet your financial obligations.
Most policies have an allowable time limit for conversion, usually 10 years. Your provider will often notify you as you approach the conversion period. Also to note, conversion is common for endowment or whole life policies.
Even though a convertible policy is a term life insurance coverage, you can change it to permanent life insurance that can outlive your coverage period.
Also, you can enjoy other advantages, such as building your cash value and earning returns as long as you pay the premiums on time.
When you borrow money from the bank for opening a line of credit, a mortgage, or buying a car, your lender will offer you credit life insurance.
The main characteristic of this insurance policy is that it's meant to pay off your debt in the event of demise.
The face value of the policy changes depending on the loan balance; accordingly, it will reduce to zero once the loan is fully paid off.
This type of insurance involves a single contract covering many people. It's a popular choice for companies taking policies to cover their employees.
Group life policies have lower premium rates, the death benefit is tax-free, and there may be minimal or no underwriting.
This policy is an additional coverage with a cost that is lower than the original insurance. It primarily works for companies where the employer pays for life insurance for their employees.
If the cover is insufficient, you can buy an extra policy through your company's coverage or from another insurer.
In the US, the American Council of Life Insurers urges the insured to have life insurance equal to up to ten times their yearly income.
Thus, your policy will not earn interest for withdrawing or getting a cash advance in emergencies.
Permanent life insurance is a lifetime policy designed to offer coverage to the people you love and care about.
Unlike term life insurance, it has a cash value that allows you to earn interest or earnings.
There are two types of permanent life insurance:
A whole life insurance policy covers you for a lifetime and allows your savings to grow at an assured or guaranteed rate. It also has a death benefit payable upon the policy holder's demise.
Universal life insurance combines savings and death benefits, and the premium may vary.
In addition, the earnings on your savings depend on the market performance. There are two types of Universal life insurance policies: variable universal life policy, and variable life insurance.
This policy invests your cash to generate higher returns. VUL policies are more or less like the universal option; however, you can invest your cash value via sub-accounts.
The main disadvantage of this plan is that the fees are higher, and there's an increased risk of losing your money depending on the market conditions.
Additionally, the premiums may increase at any time during the policy's tenure. Also, the surrender charges are generally high.
This policy lasts up to the demise of the policyholder. The bulk of your premium is invested in single or multiple investment accounts.
In addition, the payouts depend on the performance of the securities in the policy.
This type of coverage guarantees a death benefit payout to your loved ones in exchange for regularly due premium payments should death occur. Also, it allows for cash value to build up.
A whole life insurance policy is characterized by a level premium whereby you'll pay a similar rate throughout the policy duration.
The main drawback of this policy is that the premiums are higher and the returns lower than other investment types.
Final Expense Life Insurance
The final expense is a market gimmick by insurance companies. Still, in the real sense, it's a small death benefit whereby your beneficiaries receive a standard payout in case of your demise.
The amount can go up to $50,000 depending on the policy coverage.
It may not be sufficient to cater for huge expenses such as paying for a mortgage. However, it eases the burden off of your loved ones by settling minor costs such as mortuary fees.
Joint Life Insurance
Joint life insurance is a type of permanent life insurance policy for two people, but will only benefit one of them if the other party dies. It's common among married couples or domestic partners.
Pros of Permanent Life Insurance
Drawbacks of Permanent Life Insurance
When choosing your life insurance policy, there are some essential terms you'll often come across.
Premium is the monthly amount you will pay to keep the policy running. You can pay it monthly, quarterly, semi-annually, or annually.
Beneficiaries are the people or institutions that you appoint to receive the death benefit in case of demise. These can be your spouse, children, friends, investment fund, business partners, or non-profit organizations.
The death benefit is the amount of money payable to your beneficiaries in case of demise. The money is usually tax-free.
Every time you pay your monthly premium, a certain percentage goes into your tax-deferred savings account.
This amount is known as cash value and increases in value, depending on the rate determined by the insurance company.
Even though the rate is usually low, most companies guarantee a minimum rate.
Fortunately, the cash value is not affected by the market conditions and therefore is a safe long-term investment.
Overall, permanent life insurance is more expensive than term life insurance because the death benefit is guaranteed and will last as long as you pay your premiums. This explains why most people discontinue this policy at some point in time.
Every person's situation is different and what works for you may not be suitable for others. Permanent life insurance will provide a safe investment plan if you have a high net income.
If you're concerned about price, term life insurance can allow you to get favorable coverage cheaply.
Also, remember that permanent is mainly to protect you against the unexpected. Even though it has a cash value, it's not prudent to consider it an investment. Protection should always come first.
To make an informed choice, there’s nothing better than meeting with an independent financial advisor who will help you plan your insurance needs. Take the time to do things right for yourself and your loved ones. An online comparator is also the best starting point to guide your thinking.