Calculating how much insurance you need can help determine the right class of life insurance.
Buying life insurance can be an intimidating process. It might seem as though there are a million types of coverage, but there are actually only two classes of life insurance: term and permanent life. Within these classes are several variations, including universal life, and understanding the different classes of life insurance can help you make the best insurance decision for yourself and your family.
Term Life Insurance
Term life insurance provides straight-forward coverage. You pay a premium, and your beneficiaries receive a death benefit if you die during the coverage period. Premiums are low compared with other types of life insurance, but the policy does not accumulate any cash value, or savings, within the policy. Term policies are designed for an insurance need that is time-sensitive. For example, a couple with 20 years left on a mortgage might buy a 20-year term policy for each of them.
Permanent Life Insurance
According to the National Association of Insurance Commissioners, permanent life insurance offers a guaranteed death benefit and a cash benefit within the policy. The cash benefit can be accessed by taking out a loan or by surrendering the policy back to the company. Typically, premiums are higher than those for term insurance. There are different types of permanent life insurance.
Whole Life Insurance
Whole life insurance has a guaranteed premium and a guaranteed death benefit. The premium can be ongoing or paid as a lump sum. According to A.M. Best, a financial services credit-rating organization, whole life is frequently purchased to cover funeral and estate expenses. Whole life policies eventually can be converted to reduced paid-up policies, where the death benefit is lowered and no more premiums are due.
Universal Life Insurance
Universal life provides flexibility that isn't available in a term or a whole life policy in that premiums can be adjusted up or down. The cash value in the policy also can vary according to the current interest rate or the stock market if it is a variable policy. The cash value in the policy can be borrowed against or even withdrawn, depending on the provisions of the policy. The death benefit can be level or it can increase based on the cash value in the policy. A.M. Best reports that universal life is often used for estate planning or to supplement retirement income.
Variable Life Insurance
Variable life insurance is a term for any policy with a cash value amount that's affected by the stock market. The cash value can be made of stocks, mutual funds or specialty funds, depending on the owner's preference. This can lead to greater increases if the market does well or losses if the market does poorly.
