Life insurance. It’s like going to the dentist or renewing car registration at the DMV. We avoid it for as long as we can but once it’s taken care of, we feel so much better. No one likes to think about, much less talk about, what things will be like once they are no longer around, but having that conversation now can mean a lot less for family to deal with when the inevitable does eventually happen.
So where do you start? What kind of life insurance policy should you get? Well, it depends on why you are purchasing life insurance and what you would like it to accomplish in the event of your death. You should ask yourself and talk to your family about what their needs might be if they were left without your support. Families with young children have very different needs than a couple with adult children who are out of the home. The same goes for one-income or two-income households. Make a list of your individual needs and the expenses that your family will have.
Term life insurance
Many people choose to purchase term life insurance because it meets their current needs. A term life policy provides insurance for a specified length of time, or term. When the insured takes out a policy, they are required to pay premiums for the duration of the term. If the policy is needed, it will be paid in full as long as the term has not expired. At the end of the term, the policy is no longer current and the insured will need to purchase a new policy.
The main benefit of a term policy, and the reason that many people choose it, is the low premiums for a young, healthy individual. The likelihood that the insured will need the policy is low, so insurance companies are able to offer insurance at low premiums. This is a good policy for someone looking to provide a safety net in the unlikely event of their death. Situations that term life insurance is appropriate for include parents of young children looking to provide for their family in the event of an emergency or couples looking to replace the income of the insured. Term policies are also helpful in providing for funeral expenses without allocating a large portion of a family’s budget on the policy in the here-and-now. Premiums for term policies do become higher as the age of the insured increases. It can even be difficult for an older adult to get a term policy.
Whole life insurance
What about all of those premium payments? Where do they go if the policy isn’t used? With a term policy, the insurance company keeps them as profit. It is for this reason that they are able to offer policies at such a low rate. They are banking on the fact that a young, healthy individual will not need their policy during its term. But, there is an option that will allow the premium payments to accumulate as actual cash value, known as whole life or permanent life insurance. With a whole life policy, as long as the insured pays the premium, the policy will be paid upon their death, no matter when that occurs. Whole life policies come with higher premiums, which are based on the age of the insured when they buy the policy, but offer greater benefits upon that person’s death. They are often referred to as cash value policies because they have actual cash value, no matter what happens with the policy. If the insured chooses to end the policy, they are able to get the cash value of their premiums.
Whole life policies appeal to those taking out life insurance to assist with estate planning. Those who choose this option are often able to pay higher premiums, something to consider before purchasing whole life insurance. Many also like that the policy is guaranteed to be paid, without an expiration. Some policies even pay dividends during the life of the insured, which may be enough to pay the premium. Whole life policies are often thought of as investment or savings vehicles, although insurance companies are clear to specify that these policies are designed for death benefits only. Whole life policies offer a lot of benefits but do come at a higher initial cost, making them a better option for those looking to leave a financial legacy rather than cover living expenses and replace income.
Ultimately, the type of life insurance you choose to purchase depends on your needs and what purpose you want the policy to serve in the event of your death. Term life insurance is more affordable up front, making it a good option for young families or individuals looking for insurance for emergency situations without breaking the bank. However, term insurance does expire and will not pay out after that date. For a more permanent policy, whole life insurance provides death benefits without expiration and maintains its cash value for the duration of the policy. It does come with higher premiums, making it cost-prohibitive in some situations. To decide what type of policy is right for you, think about what you want or need to provide upon your death, talk to your family, and take the responsible step of purchasing a policy. You’ll feel prepared for any future, knowing that your loved ones will be financially secure.