Demystifying Different Types of Life Insurance
What are the different types of life insurance policies out there? There are a handful of different types of life insurance but only two major types:
1. Term Life Insurance
2. Permanent Life Insurance
It is hard to distinguish between all the different types of life insurance. Term Life insurance is a lower priced premium product and therefore the most common. Coverage is for a specific period of time, or “term”, from one to thirty years. The shorter the term means the lower the premium. When the initial term ends, the insurance company determines your annual renewable rate. This renewable rate is higher than the initial rate, so it’s best to make the initial term for this type of life insurance for as long as possible in order to avoid paying the higher renewal rates. If you need coverage for something like covering a major loan or business purposes, then term life insurance may work best for you, given the lower initial premiums.
To learn more about Term Life Insurance, refer to another blog post on different types of life insurance
There are a couple forms of Permanent Life Insurance to consider, Whole Life Insurance & Universal Life Insurance. Whole Life Insurance as the name implies, is a type of life insurance that will protect you for your whole (entire) life. Because this policy builds cash value and pays dividends, the premiums for Whole Life Insurance are higher when compared to Term Life Insurance or Universal Life (see below). You can borrow your cash value on this type of life insurance. The benefit of dividends is that they can be used to either buy additional insurance, or even to reduce your premiums. There are places for this type of coverage but usually my clients prefer the flexibility of Universal Life Insurance.
The key word with Universal Life Insurance is flexibility. Coverage as well as premiums are both very flexible compared to Whole Life Insurance policies. Universal Life Insurance premiums are flexible and most consumers cash flow needs change often and I like the idea of increasing my premiums in good years while having the flexibility to short my premiums in the lean years. It’s possible to pay lower premiums when compared to Whole Life Insurance. which is attractive for those looking for final expense coverage. Why pay more for a policy that will only be used for death benefit. Whole Life Insurance is old school while flexibility will remain important as interest rates remain high, causing cash values to grow faster than projected. However, if interest rates drop significantly, and you consistently shorted premiums you may end up paying higher premiums to keep the Universal Life Insurance policy in force.
Which type of Life insurance is right for me? Here are a few simple guidelines to consider: Term Life Insurance is often your best choice if you need life insurance for a set period of time like 10 or 20 years ie… protecting a loan or mortgage or if you are a parent wanting to protect your kids until they are adults. There are plenty of reason to own life insurance but for some the end solution is important, this is why Universal Life Insurance might be needed. For the lowest premium and for coverage the rest of your life, this is the type of life insurance to go with. Shop and compare the different types of life insurance rates below.