What Kind of Life Insurance Should I Choose?
The question of whether or not to buy life insurance is an important one to consider. When you decide to purchase life insurance, the next issue maybe what kind of life insurance to choose. Let’s look at three different types and the pros and cons of each.
Term Life Insurance
Term life insurance is temporary insurance that you buy for a specific time frame. The insured is guaranteed a designated amount if they pass away during the term. Once the term expires, the policy owner has the option to renew the policy, let it cancel, or convert it to a permanent policy.
Pros of Term Life Insurance
Term life insurance is perfect for someone that needs insurance for a specified period. The upfront cost for term life insurance is often very inexpensive because the cost is related to the insured’s likelihood of death. Younger, healthier policyholders will have lower rates.
Cons of Term Life Insurance
The challenge with term life insurance is figuring out how long you need it. There’s no way to predict the future and what your needs and the needs of your loved ones will be. Unexpected life events happen, and you may need more coverage than anticipated. Another downside is that the premiums increase with time. Each year the policyholder gets older, and the likelihood of death increases. With a higher likelihood of death, there’s a higher cost.
Whole Life Insurance
This type of insurance provides coverage for your whole life, as long as you pay the premium, hence the name, whole life. If you pass away while the policy is active, the designated beneficiary will receive the payout.
Pros of Whole Life Insurance
Whole life insurance premiums are fixed for life. Once your rate is locked in, you keep paying the same amount, even as you age and encounter health issues. This type of policy also doubles as an investment account. Whenever you make a payment, some of it goes toward the cost of coverage, and the remainder is added to a cash account. This account grows overtime at a rate of about 5% to 6%. The cash in a whole life policy is accessible through withdrawal, and if you cancel the policy, the money is sent to you.
Cons of Whole Life Insurance
Whole life insurance is on the pricey side. The policy is guaranteed for life, so the insurance company takes on additional risks. The rate of return can take a while because of the way these policies are written. The interest rate tends to be lower, and you don’t have any control over the investment piece of the policy.
Universal Life Insurance
With Universal life insurance, you can get the best of both worlds. It’s a flexible option that allows you to make changes to the premium or the death benefit. You get the flexibility of term life and the options of whole life.
Pros of Universal Life Insurance
Universal life insurance is not set in stone like other policies. You can make changes that fit with your life and budget while keeping your coverage. You also have a cash value, similar to whole life policies. The difference is that the interest rate is variable, which could provide a higher ROI.
Cons of Universal Life
The flexibility of universal life insurance can also pose an issue. This type of policy does not have a guaranteed premium that you get with whole life. The variable interest could yield high returns, but it could also have a low rate of return.
As you can see, there are different types of insurance to fit every lifestyle. Your needs could change throughout your life, and you may need more than one kind. Many people will combine several types to ensure adequate coverage. The most important thing is to learn as much as you can about life insurance, research your options, and choose the policy that’s a good fit for you.