Insurance & Finance

Types Of Life Insurance Explained

There are really only two kinds of life insurance: temporary coverage, which is called term insurance, and permanent insurance. Both term and permanent life insurance come in various shapes and flavors to satisfy different needs. Permanent life insurance is designed to provide coverage for as long as you live. If your needs are long-term, like estate planning or final expenses, or if you just want to leave a bigger legacy no matter when you die, permanent insurance is probably the way to go.

Whole life and universal life insurance are more expensive than term, but let’s take a look at what you’re getting for the money. Unlike term insurance, permanent insurance is generally designed to last forever. You can’t outlive a permanent life insurance policy. With most permanent policies, as long as you pay your premiums on time, your family is guaranteed to receive the death benefit no matter when you die – whether that’s tomorrow or 50 years from now.

Universal Life Insurance, one kind of permanent life insurance, offers a certain amount of built-in flexibility. You can change your premiums and death benefits to keep pace with changes in your life. Term life insurance is, by definition, temporary insurance. It’s designed to provide coverage for a limited period, typically 10, 20, or 30 years. Term policies are simple and extremely inexpensive. In most cases, your cost each year is guaranteed to remain level for whatever the term is – again, typically 10, 20, or 30 years.

Whole life insurance is what I refer to as the Rolls-Royce of life insurance. Whole life costs more than all the other types of life insurance we’ve discussed, but it does more over time. These policies develop significant cash values that are guaranteed and can be accessed at any time, regardless of what happens in the economy. Each year, the cash values grow guaranteed.

What’s the best kind of life insurance? That’s a tough question and an easy question. Different people have different needs. If there were really only one best type, there would only be one kind. I own all three types of life insurance we discussed today. My whole life policy, for example, I bought 25 years ago. I pay $4,635 each year right now. It has a cash surrender value of $217,000. Better than a lot of my other investments, for sure.

Ultimately, the best life insurance to own is the kind that’s in force on the day you die. If your policy is not in force on the day you die, you bought the wrong kind. For most people, the best way to make sure that happens is to own a policy with an affordable level premium for life.

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