Insurance is a safety net that pays you or your beneficiaries after a loss. There are many types of insurance, including life, health, homeowners, and car.
Life insurance is divided into two main types: term and whole. These types of policies differ in their premiums and coverage length.
Term Life Insurance
As its name implies, term life insurance offers coverage for a specific period of time (typically 10-30 years), during which your beneficiaries will receive a death benefit. It typically has low premium rates and is more affordable than permanent policies, but doesn’t build cash value or allow for loans.
A legal contract, a policy lays out what’s covered and what isn’t in an easy-to-read format. It’s a good idea to carefully read your policy so you understand what’s protected, how much coverage you have, and any other details.
It’s also worth looking into supplemental life insurance and accidental death and dismemberment insurance (AD&D), which are often offered through work. These are less expensive than life insurance and offer a limited amount of coverage, which may be sufficient for your needs. Alternatively, you can look into whole life or universal life insurance policies, which are generally more costly. They offer level premiums, strong guarantees, and the potential for cash values to grow over time.
Whole Life Insurance
Whole life insurance policies provide lifetime coverage, unlike term policies that expire at a certain time. The premiums you pay go toward both a guaranteed death benefit and an investment account that builds cash value over the course of your policy. You can borrow against the value of your investment account if you need to cover expenses.
There are several different types of whole life insurance, including level premium whole life and limited payment whole life. A level premium whole life policy guarantees a set rate of payments that continue to be paid for your entire lifetime, while a limited payment whole life policy has a higher premium in the early years and lower or no payments in later years. There are also participating and non-participating whole life insurance policies. Non-participating whole life insurance is more expensive than a participating whole life policy, which allows you to withdraw funds from the account to cover expenses and earn interest on your investments.
Universal Life Insurance
A life insurance policy is a legal contract that spells out your coverages, exclusions, rules, and claim procedures. Carefully reviewing your policy can help you make informed choices about what type of life insurance you need, how long it will last, and how much to pay for premiums.
Unlike term life insurance, which only covers you for a specific period of time, whole and universal life policies last for your entire lifetime as long as you pay your premiums. These policies also offer a savings component with growth that’s typically tax-deferred.
However, these savings accounts can be volatile and may lose value over time, so they aren’t suitable for everyone. Universal life policies also have different “schedules” that determine cost of insurance values and additional policy charges – these are often based on assumptions about future interest rates or market performance. These policies can include indexed universal life and variable universal life, which have higher risks because gains and losses are tied to sub-accounts that can contain stocks and bonds.