Having a plan in place for your family can help ensure they won’t struggle financially after you pass away. It’s important to understand how the different types of life insurance work and which one is right for you.
Whole life insurance provides permanent coverage, strong guarantees and valuable protection. It also builds cash value over time, which can be accessed through loans and withdrawals.
Whole life insurance
Whole life insurance is a permanent policy that covers you for your entire life. It’s more expensive than term life insurance, but it may be worth the price for long-term coverage and guaranteed cash value.
You can pay a single premium to get a whole life policy or choose a limited payment or modified premium plan. These offer higher premiums in the early years of a policy, but lower or no premiums later on.
A part of your annual premiums goes toward building the cash value of your policy, which grows over time. This cash value can be withdrawn tax-free or borrowed against for certain expenses, such as college tuition or retirement funds.
Most whole life policies are either participating or non-participating, depending on whether the company pays dividends to policyholders when they experience a surplus of earnings. Some also offer a guaranteed return rate, while others don’t. Regardless, you need to consider your financial goals and objectives when shopping for a whole life insurance policy.
Term life insurance
Term life insurance is the most budget-friendly type of coverage available. It’s a great option for young families or those just starting out in their careers.
The cost of a term life policy varies by company and is determined by your age, health and how much coverage you buy. It’s also based on the length of the policy, which is typically between 10 and 30 years.
It doesn’t build cash value or have a surrender amount if you cancel it, and your premiums can increase with age. Plus, it doesn’t have a return of premium feature, which can offer a return of your entire or part of your premiums if you die within the term period.
Term life is often the cheapest form of life insurance, but it’s not the best choice for everyone. If you have permanent life insurance needs, it’s better to look for a more comprehensive policy like whole life. Some term policies are convertible to permanent coverage, but you’ll need to meet certain deadlines to convert your coverage.
Variable life insurance
Variable life insurance is an investment-oriented form of life insurance. It offers a death benefit and allows you to invest your premium payments into a variety of asset options, mainly mutual funds.
Unlike term life insurance, which only provides coverage for a specified period, variable life insurance is permanent. It also has a cash value component that you can access for other purposes, such as to pay for a major expense.
The cash value part of a variable life policy is invested in an account that you manage as the policyholder. Depending on the insurer, you can choose from managed mutual funds or fixed accounts like stocks and bonds to invest your cash value.
However, you will be responsible for the risk of losing money if your investments don’t perform well. You also pay fees and expenses that are higher than those associated with other forms of life insurance. If you’re concerned about the potential for loss, talk to a financial professional before buying variable life insurance.
Universal life insurance
Universal life insurance is a permanent, lifetime form of insurance that’s similar to whole life but with some extra features. It can be a good option for people who are looking for more flexibility in their premiums and death benefit.
Universal life policies are available in many forms, including traditional or non-guaranteed universal, guaranteed or indexed universal and variable universal. Each has its pros and cons, but all provide flexibility to adjust your policy.
Indexed universal life, for example, lets you invest in stocks, bonds and mutual funds. The cash value of your policy appreciates based on the performance of an index, such as the S&P 500 or NASDAQ 100.
Variable universal life gives you more control over your investments and may offer higher interest rates than traditional universal, but you have to watch for volatility. This can lead to higher premiums or a lower death benefit if your investment portfolio doesn’t perform as expected.
