What are the different types of life insurance?
Because every person has unique needs, different types of insurance exist to serve different purposes. To simplify the process, think of these three buckets when it comes to life insurance options:
- Term life
- Whole life
- Universal life
Term life insurance is considered temporary insurance, providing protection for a set period that you choose. You might want coverage for the next 10 years, or maybe until you turn 65. Term life can be a great option when you want coverage in place until your children are grown up or until the mortgage is paid off. The application process also tends to be simple and straightforward, with lower premiums (payments) to start. Your monthly premiums will be based on your age and health. Depending on your needs, a term life policy can be extended or renewed for further set periods.
Whole life insurance is considered permanent insurance, providing ongoing protection for as long as premiums are paid. This type of policy costs a bit more, but premiums don’t increase as long as the scheduled payments are being made. A whole life policy offers both a guaranteed cash value and a death benefit. The cash value continues to grow as long as the policy is active, and that cash amount can be accessed by the policyholder.1 The death benefit is a tax-free payment to designated beneficiaries,2 which can help to pass wealth on to the next generation or cover tax liabilities at death. Some whole life policies receive a credit or dividend every year. These policies have the potential to grow the death benefit and cash values beyond the guaranteed values.
Universal life insurance is also considered permanent insurance, while offering more flexibility than whole life insurance, as well as some investment options. Coverage stays in place while premiums are paid and there is potential to accumulate some cash value if desired. Cash can be withdrawn from the policy, but withdrawals affect the amount paid out to beneficiaries as a death benefit later on. The deposits you make into the policy are placed into an investment account of your choice. Your advisor can go into greater detail on what investment options are available.
