As a general rule, buying insurance early helps lower the price. As you age, the premiums tend to rise. Locking in your premium rates over the life of your insurance may help save money in the long-term—as could buying coverage for a longer period of time, if that suits your needs. Don’t buy more than you need, but keep in mind that expanding your coverage later on could be more expensive than adding those features while you’re young.
If you are considering purchasing life insurance, it is crucial to understand the different types of policies available. While term life insurance is pretty simple to understand, permanent life insurance come in many forms, with investment options that increase their complexity.
Here’s what you need to know about the different types of life insurance before selecting a policy.
Term life insurance
Term life insurance is easy to understand. Consumers select a policy for a specified amount of time, often 10, 15 or 30 years. The insurance premium stays the same each year of that term. As long as the premium is paid, the insurance company pays a death benefit should the policy owner die before the term expires.
Is term life insurance right for you?
Term life insurance is a good option for those who only need life insurance for a specific period of time. The insurance might be purchased to cover child care and education costs for children should the policy owner die before they finish their schooling. Or it could cover a spouse or other beneficiary’s living or retirement expenses if the policy owner dies during the income-earning years.
People who buy term life insurance often build savings through other means, like retirement accounts and investments. That way, when the term policy runs out, they don’t necessarily have to buy another policy if their future financial needs are covered by other investments.
Term life insurance is generally less expensive than permanent insurance. It may be the best choice on a limited budget, helping to replace some of your lost income and provide financial support for your family if you should die.
The cons of term life insurance
Policyholders may need to take a physical exam to apply. Health status, age, gender and other risk factors affect the premium cost, and insurance companies can decline to cover you.
If a policyholder decides to renew his or her term policy after it expires, the price will increase. Term insurance is not an investment vehicle, so when the policy ends the policy owner gets no financial benefit.
Permanent life insurance
Permanent life insurance is an umbrella term that includes whole life, universal life, index-universal life and variable-universal life insurance. Permanent life insurance has a death benefit, and sometimes a savings vehicle too.
The differences between these options involve how the investment portion of the policy works. Both permanent and term life insurance policies sometime offer riders, such as additional payments for accidental death or premium payments made on your behalf if you become disabled.
Is permanent life insurance right for you?
Permanent life insurance is good for people who want to maintain life insurance throughout their life with a fixed premium. Others are attracted by the forced savings element of these policies. Variable policies and those that invest in index funds entail greater risk and can earn more or less than fixed options, depending on the market.
The cons of permanent life insurance
Permanent life insurance typically requires more premium than term life insurance for the same death benefit. The cash value portion must also be used during the policyholder’s lifetime. There are different ways to do this, including tapping the money as a low-interest loan, possibly for college or a house, although any money not repaid is subtracted from the death benefit.
For some policies, the policy’s cash value can also be used to pay the insurance premiums later in life. Some policies can be cashed out, which negates the death benefit, or restructured so the accumulated cash value increases the death benefit. A financial advisor can explain the benefits and drawbacks of each option in more detail.