13.08.13 Basement Nerd Compare Life Insurance Policies
The Importance of Life Insurance and the Different Types
Many people look into getting life insurance only to find out that it’s not quite as simple as they thought. There is no one simple type of life insurance for everyone; instead, there are four different types of life insurance. There are some major differences between the four, and it is important to know these differences before you select a policy.
Why Life Insurance?
Why is it important to have life insurance at all? Life insurance pays out if you die unexpectedly. It provides your beneficiaries with a lump sum of money that they can use as they see fit. This is especially important if your spouse does not work or if your income supports your family. The money from a life insurance policy may also help cover funeral expenses and pay off outstanding debts. If you do not have life insurance and die suddenly, your family may be left with many financial burdens.
Whole Life Insurance
Whole life insurance covers your entire life. It doesn’t matter how long you live or when you die—you are covered. The premium generally remains the same. Many insurance companies actually take a portion of the premium you pay and invest it. Some even pay out dividends to policyholders.
Term Life Insurance
Term insurance is similar to whole life insurance with one exception: it only covers a specific time period. If you die at any point during that time, the insurance pays out. If you outlive the policy, it does not. Another difference between term and whole life insurance is that companies generally do not invest any money from term insurance premiums.
Universal Life Insurance
With whole or term life insurance, the amount paid to beneficiaries is set by the insurance company. With universal life insurance, however, you may want to pay in more than the minimum required premium. The insurance company will then invest this extra money, usually in either mortgages or bonds, and places the returns in a cash-value account. You can access this cash-value account and use it to pay your premiums or let it build up.
There are two types of universal life insurance policies:
- Type A or Type I: The cash-value account is considered a part of the face value of the overall insurance policy. The beneficiary is given the total of the account plus the amount of the life insurance policy minus the amount of the account.
- Type B or Type II: The beneficiary receives the entire amount of the life insurance policy plus the total amount of the cash-value account.
The second type obviously looks better at first glance, but generally, the premiums are higher. They may also increase as you age, while Type I premiums may not increase that much.
Variable Life Insurance
Variable life insurance gives you more options than other types of insurance. It is very similar to universal life insurance, but you get to decide how your premiums are invested. These options include bonds, mortgages, and stocks. Just like with universal insurance, you can use any returns to pay your premiums or let them accumulate in an account. Variable life insurance policies may also be Type A/I or Type B/II as described above.
It all depends on your needs. Some people prefer to purchase a term insurance policy that only covers them for a short amount of time (until their children are grown, for example), while others enjoy the flexibility of a variable life policy. You should weigh the benefits of each and, of course, pay close attention to the final payout amount of the monthly premium.