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It is easy to assume that you only need life insurance if you are married or if there is a person who depends on you financially.
While these are reasons to purchase individual life insurance for the first time, you may also need a minimal amount of coverage if you do not want to pass the burden of paying for your final expenses onto your family, or you would like to pass on a legacy to people you love, life insurance is the right product for you.
Deciding whether or not you need insurance is easy, but choosing between different types of products can be very intimidating when you do not know the difference between each option.
While there are only two different categories of life insurance, which are term and permanent plans, there are subcategories within these groups that all have their own characteristics that make them different.
You must first distinguish between each type of policy, and only after you know the differences can you learn which plan is best for certain goals, budgets and circumstances.
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Here is your guide to life insurance basics and selecting the right plan to suit your personalized needs:
What is term life insurance?
Term life insurance are for individuals who like simplicity. This is a temporary type of coverage that will provide you with life insurance benefits for a stated period of time. The period of time is the term length.
Term life can also be called pure insurance because it strictly offers a death benefit and does not have an investment component.
The face value of the policy is the amount that will be paid out in the event that you die of illness or in an accident during the stated period.
What are the advantages and disadvantages of term life?
You have to consider both the advantages and disadvantages of any type of product that you are giving consideration to. One of the biggest advantages of products that fall into this category of insurance is that it is affordable.
You will be able to purchase the maximum amount of coverage for the least amount of money no matter what rating classification you fall into. If you do decide you later want a permanent plan, the policy is convertible into a permanent plan without going through more underwriting.
Because the rates for term life at lower, you will be able to buy a larger death benefit that will help you protect your financial obligations for periods of 5 to 40 years.
Where there are advantages there are also drawbacks. The biggest drawback is that there is an expiration date for your policy. Because the policy expires, there is a chance that you may not medically qualify for a new policy once you reach the end of your current term.
If you do qualify, the rates for the new policy will almost always be higher because they will be based on your new age.
If the policy expires when you are in your senior years, you may not even be eligible for a traditional policy with a traditional life insurer.
What Types of Term Life Insurance Can You Purchase?
Not all term insurance policies are created equal. There are traditional guaranteed level term policies and there are also annual term policies that will renew every year.
There are major differences between annual and level term policies, and these differences often have to do with rates.
Here are brief explanations one the features of each:
Guaranteed Level Terms
Level terms carry a level death benefit that is guaranteed for the entire term period. This term period can range from 5 years, which is more affordable, to 30 years, which carries higher premiums because the rates are secured in for so long.
If the premium is not guaranteed, the rates can go up within a few years of you starting your policy. This is why you need to read the terms and conditions closely so that you choose the right plan.
Typically, you will need to submit medical records, answer medical questions, and even visit a doctor to get approved for a guaranteed level term policy.
Annual terms were once the most popular type of insurance sold. With the newer products available, these policies have died in popularity due to the way that they work. When you buy annual term insurance, you are binding coverage for a single year.
You do have the option to renew the next year, but your rates will go up every time that you renew. One of the major advantages is that you are not asked to take a medical exam for this specialized form of coverage.
Because no underwriting is required, this is a good choice for people with medical conditions who may not be able to find traditional coverage elsewhere.
What is permanent insurance?
As the name would suggest, permanent life insurance lasts for the remainder of your life as long as you keep your premiums up-to-date. This is a benefit in and of itself if you will always have some level of need for financial protection no matter what age you are.
Permanent insurance is a financial product that has an investment component that accumulates cash and a death benefit component that is pure life coverage.
What are the advantages and disadvantages of permanent life?
Permanent insurance is often called cash value insurance because the policy has a rising benefit that can be used as a living benefit in the form of a withdrawal or a loan. The money you pay will go towards the premiums and also towards the cash account where it is invested and will earn money.
The values will add to the death benefit if left untouched, giving your heirs a larger benefit. Permanent insurance has tax advantages while the policy is active so you can write off what you put into the plan annually.
With this being said, cash value policies are very expensive because you are paying for term life and an investment.
What types of permanent life are available?
Not all cash value policies work in the same way. Due to the complex nature of permanent insurance plans, you need to know how each plan works before you settle on a single option.
The two most popular types of cash value life policies are whole life and universal life. Here are how the two differ:
Whole life is a cash value policy that offers straight life coverage for a lifetime.
The premiums of the policy are higher at a younger age and the additional money that you pay will be put into a cash account value where it will earn interest so that it can later pay for the higher cost of insurance as you age.
Your premiums will stay level as long as you do not borrow or take cash values out. Whole life does not offer you much flexibility.
Universal life is a newer type of permanent insurance that has more flexibility for policyholders who want to pay less now and then increase their funding as their income rises. Universal life also has a policy cost for pure insurance and money that goes into the cash accounts where it is invested in money market vehicles.
You will typically earn the money market rate of interest, but that is not guaranteed. What you earn on your cash account will dictate how much you will pay as the pure life costs go up. These policies require more attention for funding to avoid running out of cash value to pay for the death benefit.
How to Decide Which Policy is Right
With an understanding of the policy types you can decide on the plan that you will buy now.
Not every plan will meet every consumer’s needs. If your financial obligations are the purpose for buying insurance, you have to consider how long these circumstances will last.
If there is an end in sight, you need term insurance. Some circumstances include paying off your mortgage, paying off credit card debt, replacing your income, and paying for dependent expenses when the dependents will leave the home.
If you cannot get traditional term, the specialty annual term is an option for a no-underwriting option at a higher cost.
Term life may not meet all of your needs, and when this is the case you will need permanent insurance. If you will need cover as long as you live, compare the plans.
Some examples would be if you have a business, you want to pay estate taxes or you want to pass money to your heirs.
Buying insurance can be easy once you know what type of plan is right. After you decide, you can use an online rate comparison tool and enter your information, such as the FREE tool at the bottom of this page.
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