How to Figure out Which Life Insurance Policy Type Is Right for You

Posted on July 17, 2018

Are you worried about the future and considering life insurance options? With so many different life insurance policy types on the market, it can be difficult to know which option is best for you and your unique life situation. The last thing you want to do is sink your hard earned money into a policy that won't provide the benefits you need if the worst case scenario occurs.

In this article, we'll cover everything you need to know about two major life insurance policy types, including how they work, when you'd need them, and the benefits of each option.

What are the Major Life Insurance Policy Types?

When it comes to life insurance, there are two different types of life insurance you should know: term insurance and permanent life insurance. Knowing the difference between these two options is essential to picking the right policy for you.

What is Term Life Insurance?

Term insurance is the simplest type of life insurance policy. It offers coverage for a certain period and is most often used to cover short-term needs. It's often referred to as "pure life insurance" because it's meant to protect any dependents you have in case you die early or suddenly.

With this type of insurance, you choose the term or length of the insurance coverage. The most common term policies last between 10, 20, or 30 years, but in some cases, this insurance can be extended to 40 years.

This type of insurance is ideal for people with a riskier line of work, or who are worried about dying prematurely. With this insurance, you buy the amount your family would need if you were suddenly unable to support them financially. The payout from the insurance can help take the place of your income.

This insurance is best suited for people with young children, or for people who need a financial safety net for their family. In the best-case scenario, your family's need for life insurance will dissipate by the time your term insurance expires.

How Much Does Term Life Insurance Cost?

Term insurance is relatively cheap because it's temporary and offers no cashout. Often, the insured party lives to the end of their term, which means the family doesn't receive any sort of payout.

In some cases, you can add a return-of-premium rider to your term life insurance policy, which means you'll receive the sum of premiums paid if you live past the end of your term. This addition will increase the cost of your policy though.

What is Permanent Life Insurance?

Unlike term insurance, permanent life insurance is an insurance policy that provides coverage for your entire life. This life insurance policy type also includes the policy's cash value, which is an investment component. The policy's cash value is tax-deferred and grows slowly, which means you're not required to pay taxes on any gains as they're accumulating.

With permanent life insurance, you can borrow money against your account or give up your policy for a payout. It's important to know that if you don't repay policy loans with interest, your death benefit will be reduced, and if you decide to give up your policy, you'll no longer have coverage.

When it comes to permanent life insurance, the death benefit is always guaranteed, and the premium will remain the same for the duration of your life. The cash value account will also grow at a guaranteed rate. In some cases, your permanent life insurance policy may earn annual dividends, which is a portion of the provider's financial surplus.

You can accept these dividends in cash, use them to decrease your premium, or put them toward policy loan payments or toward buying additional coverage.

How Much Does Permanent Life Insurance Cost?

Permanent life insurance costs significantly more than temporary life insurance because it covers your entire lifetime. It also has cash value and a guaranteed rate of investment return based on the portion of the money that you pay. Permanent life insurance can cost upwards of four times that of a temporary policy, but it's important to know that you can pay for your coverage costs in a variety of ways:

  • Annual or monthly installments
  • For a certain number of years
  • Until you reach a certain age
  • One lump-sum payment

If you choose to make less payments, you'll have higher rates for each premium payment you make. But if you pay more money earlier on, you'll be able to build a larger cash value because you'll have more time to grow your interest.

The Main Differences Between Temporary Life Insurance & Permanent Life Insurance

Still not sure what the difference is between these life insurance policy types? Here are the policy features of a temporary life insurance policy:

  • Choice of policy length
  • Consistent premium
  • Guaranteed life insurance payout amount

Permanent life insurance offers many of the benefits of temporary life insurance. It also offers the following additional features:

  • Lifelong coverage
  • Accumulated cash value
  • Possibly eligible for annual dividends

Which Life Insurance Option Should You Choose?

If you need life insurance to replace your income for scenarios such as raising children or paying off your mortgage, term life insurance may be best for you. This type of insurance policy is also ideal for people who want coverage but cannot afford to pay for permanent life insurance. What's great about this policy is that you can often convert your term life policy to permanent coverage, although the deadline for conversion does vary by provider and policy.

If you're someone with an estate, you may want to consider permanent life insurance. This insurance policy makes it easier to provide your heirs with the money needed to pay any of your estate taxes. If you don't have a life insurance payout, those heirs may need to sell off parts of your estate to foot the associated tax bill.

Permanent life insurance is also great for anyone with a lifelong dependent like a child with special needs.

Final Thoughts on Life Insurance Policies

No one wants to think about death, but it's important to keep in mind when planning the financial security of your family and loved ones. By reviewing the life insurance policy types in this article, you can choose the policy that makes the most sense for your situation.

Are you in need of life insurance? Not sure where to start? Contact us to get a quote on your life insurance options.

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