Life insurance helps your family in the event of your death. There are many different types of life insurance, so you need to know what the differences are and which type will be most beneficial to you and your family. The following guide breaks down the basics of life insurance into easy-to-understand terms and covers some topics that not every article on life insurance will tell you about, such as tax deductions. Read on to learn about the principal types of life insurance and how to choose the right one for you.
Term vs. Permanent
In most cases, term and permanent life insurance serve different purposes. The first is designed to replace your income after death. The second provides coverage over a long period of time or even your entire lifetime. Permanent insurance also carries more bells and whistles like cash value accumulation and premium payment flexibility. It’s important to evaluate both term and permanent policies carefully in order to determine which is more affordable for you—and which better fits your situation.
Whole vs. Variable Universal Life
If you’re looking for a basic bucket of coverage (what is commonly referred to as a term policy), then whole and variable universal are good options. The latter tends to have slightly better benefits (and higher costs) than its counterpart.
Level vs. Guaranteed
There are two basic types of life insurance coverage: level and guaranteed. Level policies allow you to choose how much coverage your premiums will provide—the more coverage purchased, the higher premium cost. Guaranteed policies have fixed amounts of coverage; however, they are subject to underwriting if certain health conditions or risk factors exist. If your application is approved, your policy remains constant throughout its term; if not approved, you lose access to coverage. Underwriting depends on a number of factors including age and health status.
Cash Value vs. No Cash Value
Cash value life insurance pays a death benefit plus builds up cash value in an investment account. The money in your policy’s cash value account can be used for just about anything—it’s completely flexible and tax-free until withdrawn. You do, however, have to pay taxes on any growth within these accounts (some states even levy income taxes). So if a policy is withdrawn or surrendered before it’s fully paid off (maturity), you may face a hefty tax bill.
Low Cost vs. High Cost
In general, it is a good idea to avoid low-cost term policies. If something happens and a family loses its primary breadwinner—the person who pays most of the family’s bills—they may not be able to pay those bills without help. Term policies might seem like a bargain at first: The more coverage an individual buys and lives longer, after all, the less expensive each monthly payment will be.
Modified Endowment Contract
A modified endowment contract is an agreement between a person and an insurance company that guarantees a death benefit to pay off certain loans or debts if someone dies. Although technically not a form of life insurance since there’s no insurance risk, it serves as protection in case someone with outstanding debts passes away.