If you’re trying to do the responsible thing and research the different types of life insurance, first off, way to go! By now, you probably know that there’s a lot to learn about life insurance. While there are plenty of resources online, it can be overwhelming and even confusing at times. The goal of this blog is to give you a brief introduction to the different types of life insurance and give you the tools you need to continue making responsible, informed decisions!
Useful Insurance Terms
As you continue to research life insurance, you’re likely to come across a lot of jargon that may be unfamiliar to you. Take a moment to familiarize yourself with the lingo. Learning the following terms will help you make sense of it all. There will be a test at the end (just kidding).
Beneficiary – The person (usually a family member) that receives the payment from your policy.
Policyholder – The person covered by the life insurance policy (presumably you).
Death Benefit – The money your beneficiary gets if you pass away.
Premium – The money you pay the insurance company for coverage.
Underwriting – The process insurance companies use to determine whether or not a person is insurable.
Rider – A provision that amends or alters certain aspects of a policy.
Types of Life Insurance Policies
Term life insurance is the easiest type of life insurance to understand. You pay a premium and in exchange, the company agrees to pay your beneficiary in the event of your death. It’s called “term” life insurance because policies only cover you for a fixed period of time – usually 10, 20, or 30 years. Unlike whole life plans, there is no cash value or payout at the end of the policy (we’ll get to that in a moment). However, you can usually renew the policy or potentially convert it into a whole life plan.
So, how do you know if a term life policy is right for you? It depends on what you want to get out of your policy. If you’ve just started a family (or you’re planning to do so soon), term life policies are perfect for you and your spouse. They are cheaper than whole life policies and provide more coverage for the duration of the policy. Mortgages, credit cards, car payments, and living expenses are all financial burdens you could leave behind. If something were to happen to you, a term life policy ensures your family has the means to cover these expenses.
But young families aren’t the only ones who benefit from term life policies. Students fresh out of college often accumulate substantial student loan debt. If a family member cosigned, they may be responsible for paying that debt in the event of your untimely death. Obviously, you won’t need the coverage after you’ve paid off your student loans, which makes the limited nature of term life policies perfect for this scenario.
Whole life insurance is the most common type of “permanent” life insurance and is a little more complicated than its term life counterpart. As the name suggests, these policies stay with you for your whole life as long as the premium is paid. Aside from the period of coverage, the main difference between term life and whole life is an investment component. Whole life policies build cash value at a set interest rate over the years. Depending on the plan, you may be able to take out loans against the cash value of the policy.
Because whole life policies have a cash value and can accrue interest, premiums can cost up to ten times more for the same death benefit. For this reason, policyholders often use whole life plans as an investment tool or to help with estate planning. Policyholders in their later years may also rely on their whole life policy for end-of-life expenses, such as funeral costs.
Ultimately, the life insurance option you decide to go with will depend on what you want to get out of the policy. Regardless of your needs, a solid life insurance policy can provide protection and support for those you love.
Now that you’re familiar with the different types of life insurance, you’re probably wondering how much you should purchase. In our next blog, we’ll discuss how you can calculate an amount that is right for you. Stay tuned!