If you’re not familiar with the different types of policies, the starting point is to research the main types of life insurance: term and permanent.
Term Life Insurance
Term life insurance, sometimes referred to as temporary life insurance, offers coverage for a set period of time, commonly 10, 20 or 30 years. Most term policies are renewable after the term ends, with a new monthly rate set based on your age and health status at the time of renewal. Some term life insurance policies contain a conversion option that allows you to convert the plan to a permanent plan by a deadline set by the insurance company.
If the insured policyholder dies during the term, the death benefit will be paid to the named beneficiaries. However, if the term expires before the insured person dies, no death benefit is paid. Unlike permanent life insurance, term life insurance policies do not feature a cash value component.
Permanent Life Insurance
Unlike term life insurance, permanent life insurance policies last for the insured’s entire life and feature a cash value component. Some common permanent life insurance plans:
- Whole life insurance is the most common form of permanent life insurance that allows you to withdraw or borrow money against the policy’s cash value. Whole life policies are fairly predictable in that they have fixed premiums, fixed benefits and a fixed rate of return. This can be a drawback if you want more flexibility for premiums and cash value returns.
- Universal life insurance is a form of permanent life insurance that offers the additional features of having flexibility with your premiums and adjusting the death benefit. Universal life policies can grow in cash value when interest rates rise but require regular monitoring to avoid underfunding, which can require you to make large payments to catch up. You may also face tax consequences by excessively overfunding your policy.
- Variable universal life offers flexible premiums and allows you to invest through sub-accounts tied to financial markets. On the plus side, variable universal life plans can help build wealth if your subaccounts perform well. On the other hand, since investment returns are not guaranteed, you can lose cash value on your policy when markets underperform.
