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Shopping for a life insurance policy can be a daunting task if you haven’t done your research. Although the insurance world can be a tricky one to navigate at times, learning the basic concepts and terminology is half the battle. Once you understand the different types of policies available to you, as well as the benefits and drawbacks of each option, you’ll be in a better position to start making decisions about your life insurance needs.
But before you consult an insurance agent or broker, you should have a few personal preferences figured out, such as how long you want the policy to last, how much you can reasonably afford to pay in monthly premiums and whether you want to be able to withdraw funds from the policy in the future. This will help you determine which life insurance policy will work best for you, and for your loved ones.
What to Know About Term Life Insurance
The first thing to consider is whether to go with a term, whole or universal life policy. Term life insurance, also known as “pure” life insurance, is considered the most straightforward form of protection. By paying premiums on a monthly or annual basis, you will be covered for a designated period of time, hence the name “term.” These policies are typically sold in lengths of five, 10, 20 or 30 years. If you pass away during that time frame, your beneficiaries will receive the full death benefit. If you outlive the term, however, the cost of the policy increases dramatically, often leading policyholders to abandon the policy altogether.
Permanent Life Policies and How They Work
Whereas term policies have an expiration date, permanent life insurance—a broad phrase used to describe several different, specific types of insurance—will last for as long as you pay the premiums. In short, they provide lifetime coverage. Whole life insurance is a type of permanent policy that has a cash value component, meaning the premiums you pay each month or year are partially used to fund that cash value. Generally speaking, whole life policies are more complex than term offerings, especially when stipulations such as surrender fees, taxes, interest and other complicating factors come into play.
Although whole life policies don’t come with a predetermined end date, they can be costly—in fact, whole life policies can be anywhere from six to ten times more expensive than your average term policy.
Universal life policies, which are another form of permanent life insurance, are known for their flexibility. With a universal life plan, you have the ability to adjust your death benefit, and to pay your premiums in any amount at any time after the first payment has been made. These policies are considered a hybrid of sorts, as they combine elements of term insurance with an investment savings option.
The key to universal life insurance is that it gives you freedom of choice in what you can do with the savings or investment portion of the premium. It also requires a more “hands-on” approach when it comes to managing the policy, and it tends to be more expensive than term insurance.
In many cases, term life insurance ends up being the best option for people seeking an affordable, straightforward, easy-to-manage life policy. Others favor permanent policies for the “forced savings” aspect, as these plans allow policyholders to accumulate cash they can bank for retirement or expenses down the line.
Whether you decide to purchase a term policy or a more comprehensive alternative like whole life insurance, it’s important to discuss your options with a licensed agent, broker or financial advisor. No two life insurance policies are exactly alike, but knowing the extent of your options can help you make an informed decision.