What Type of Life Insurance Should I Buy?
- Term life insurance provides basic death benefit protection. A premium is paid in exchange for a death benefit. Premiums are low relative to the death benefit amount. The death benefit is guaranteed as long as all required premiums are paid. When the term policy matures, the policy terminates. Term policies mature anywhere from one year up to 30 years. When the policy matures, you may opt to renew the policy for another term and pay higher premiums. This policy is best when you need insurance but cannot afford expensive premiums. You should consider building a savings in addition to the term policy death benefit so that you have something for your family if you die after the term plan matures.
- Whole life insurance comes with premiums that are higher than term insurance premiums. The excess premium is invested and a cash reserve, called a cash value, is created. This cash value is money set aside to pay for the future costs of the insurance policy. The policy's maturity is age 100. The cash value and death benefit will equal each other at this age. Because of this, all elements of the policy are guaranteed. This policy type is best when you want lifetime coverage and want to combine your savings with insurance.
- Variable life insurance removes some or all of the guarantees of whole life insurance, depending on the policy. Some or all of the premiums are invested into mutual funds. The policy's death benefit and cash value are determined by the performance of these funds. The extent to which premiums are invested into these mutual funds is the extent to which the death benefit and cash value are dependent on the funds' performance. This policy type is best when you are willing to give up some or all of the guarantees of the whole life policy for a higher potential return on your cash value in the policy.
- Universal life combines elements of term life and elements of whole life and variable life. Premiums are deposited directly into a cash account. This money is invested and the cost of the insurance policy is deducted from the cash account. Interest is then credited to the cash account. When there is no more money left in the cash account, then the policy terminates; otherwise, it stays in force until your death. The policy's insurance component is a one-year renewable term policy. These policies give you the flexibility to change the death benefit amount at any time along with the premium payments you make to the policy. The policy does have one downside: it stipulates maximum insurance charges and minimum investment performance, which normally will not support the policy. The insurer assumes that insurance charges will be lower than the guaranteed rate and that investment earnings will be higher than the minimum rate, but there is no guarantee that they will be. If the assumptions of the insurer turn out to be wrong, your policy could terminate leaving you without insurance. This policy type is ideal when you want maximum flexibility in your life insurance policy and are willing to take on the extra responsibility and risk required with this policy.