The main purpose of life insurance is to provide financial support to your beneficiaries (usually your family) in case you die. But there can be more that life insurance offers depending on what type of policy you get. Let's cover the different types of life insurance and what you need to know about each of them.
Term life insurance
Term life insurance is one of the most common types of life insurance. It is temporary, meaning your coverage will only last over the course of a predetermined number of years, known as the term. If you die during the term, your beneficiaries will receive a predetermined death benefit amount. Once the term ends, you no longer pay premiums for the policy, and no death benefit will be paid to your beneficiaries.
The premiums for term life insurance tend to be less expensive than other types of life insurance. Many people purchase term life insurance for a period of time that would cover their children until they are old enough to support themselves and/or to support their spouse until retirement. Term life insurance can also be good for covering financial obligations, such as a mortgage.
Level term life insurance
With a level term life insurance policy, the amount you pay remains the same for the entire term, and so does the death benefit.
Annually renewable term life insurance
Premiums may change every year with annually renewable life insurance. Most of the time this means you pay less in the early years of your policy while you're still young, but you pay more as you get older.
With any kind of term life insurance, you may be able to convert the policy to a permanent plan, which can offer different coverage options as well as other benefits.
Permanent life insurance
Permanent life insurance has a death benefit that does not expire. So long as you satisfy any requirements to keep the policy active, you'll be covered for your entire life. This is why permanent policies can be more expensive than a term policy, even for the same death benefit amount, but that's because they usually offer other benefits as well.
Permanent life insurance policies accumulate cash value, which can be accessed at any time during your life1.
Whole life insurance
One of the most common types of permanent life insurance is whole life insurance. With this type of policy your premiums will stay level and the cash value is guaranteed a minimum growth rate (or it may also grow at a faster rate with dividends).
Universal life insurance
Similar to whole life insurance, universal life insurance accumulates cash value and has a death benefit that won't expire, but you have more flexibility to adjust the premiums or death benefit to suit any major life changes.
It's always a good idea to consult a professional financial planner to help you make sound decisions.
The bottom line
With all the different life insurance policy options to choose from, understanding the differences helps you pick the best one for you. First decide if you need a term policy or permanent, and then you can start to think about how much flexibility you might need with your policy.
1DisclosureUtilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).
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Original Source: Everything You Need to Know About the Different Types of Life Insurance
