Thinking you may need life insurance, but want to know more about how it works?
Here’s a quick primer to get you started in your search for the right kind of coverage.
We know: How Life Insurance Works
Why do people buy life insurance?
People generally buy life insurance to provide money for their family in the event of their death. This is called a death benefit.
What kinds of life insurance are there?
The two most common kinds of life insurance are:
- Term insurance, which provides protection for a specific term of time, usually from 1 to 30 years. Your family receives benefits only if you die within that term of time. When the term expires, you may be able to renew the policy, but your premiums will increase.
- Permanent insurance, which provides protection for as long as you make the premium payments. This kind of insurance is designed for someone who intends to keep the insurance over a long period of time. Permanent policies usually provide a ‘cash value’ or ‘cash surrender’ option.
What does ‘cash value’ mean?
Cash value means you can cancel the policy and receive the cash value as a lump sum. You can also use the cash value to continue your insurance protection for a specific period of time, or to borrow money from the insurance company.
What kinds of permanent life insurance are there?
- Whole (or ordinary) life insurance usually features premium payments that remain constant over the life of the policy.
- Universal (or adjustable) life insurance usually allows the buyer to pay premiums at any time, subject to maximums and minimums. The amount of the death benefit is also adjustable.
- Variable life insurance allows the buyer to allocate premiums among a variety of investments and varies the death benefits and cash values of the policy according to the performance of the investment portfolio.
What are the advantages and disadvantages of term insurance?
Term insurance has lower initial premiums in the beginning, so you can afford higher levels of coverage when you're young. This could be helpful in covering things like mortgage payments, should you die at an early age.
Term life insurance premiums increase as you age and the policy generally doesn't offer cash value or paid-up insurance.
If you want insurance protection only, and not a savings and investment product, buy a term life insurance policy.
What are the advantages and disadvantages of permanent insurance?
As long as you pay the premiums on permanent insurance, the protection is guaranteed for life. You can adjust the premium costs to meet your needs. The policy accumulates a cash value, and you can sometimes purchase additional insurance without taking a medical exam.
Premium levels can make it hard to afford enough coverage. Also, if you don’t keep the policy for a sufficient time it can be costly.
If you want to buy a whole life, universal life, or other cash value policy, plan to hold it for at least 15 years. Canceling these policies after only a few years can more than double your life insurance costs.