You can’t turn on the radio or TV without hearing at least one advertisement for life insurance. They promise that your loved ones will be taken care of for just pennies a day — but they never really explain what life insurance is, and if you’ve gone to a public school in the last 20 years, you probably don’t have any idea what it is, either.
If you’re getting to an age where you’re starting to wonder about life insurance, you’re in luck — we’re here to help. We’re going to break down the four main types of life insurance for you, as well as explain each type’s pros and cons to help you make the best decision about your future and your family’s future.
Whole Life Insurance
Whole life insurance, also known as permanent life insurance, is one of the most common types of insurance policies being sold to date. There are three different subsections of this type of insurance, each with its own type of policy — whole, universal and variable. We’ll discuss the latter two in more detail in a moment.
The biggest pro with whole life insurance is that it’s designed to offer death benefits no matter when you die — even if you turn out to be one of those people who lives to be 100 or more. Other type of life insurance have a set term, and once that term runs out, you have to renew the life insurance — often at higher cost — to have continued coverage.
Another benefit of whole life insurance is that your premiums stay the same throughout your entire life. The premiums are higher than some other forms of life insurance, which might seem like a downside, but that’s because it’s essentially future-proofing your policy. When you’re young, it’s easier to pay high premiums than when you’ve retired and are on a fixed income.
Your premiums are used to build additional value — they’re invested by your insurance company. If you need money in the future, you can also borrow against this cash value without being penalized or taxed. Whole life insurance is almost always set at a fixed return rate, so you know your premiums, your investments, are secure and ready for you in the future.
Universal Life Insurance
Universal life insurance is a hybrid of term life insurance and money market investments. This type of investment tends to offer a higher rate of returns, but because money market investments are always fluctuating, you may not see a guaranteed rate in your paperwork.
A major benefit of universal life insurance is that if your financial status changes, you may have accumulated enough cash value to cover your monthly premiums for a while until your financial status is stable again. It’s important to check with your insurance provider before you stop making payments, but this may be a good option in the event of a job loss or other financial crisis.
Variable Life Insurance
Variable life insurance is another form of universal life insurance — the difference lies in the way the money is invested. In addition to the death protection insurance, variable life insurance also comes with a savings account you can use to invest in all sorts of different fields. Most frequently, the investments go into stocks, mutual funds, money market investments and bonds.
Variable is the riskiest form of life insurance — even if you’re good at playing the stock market, investing money never guarantees a return. If you choose the wrong investments, your cash value could drop dramatically.
Many insurers that offer variable life insurance policies do guarantee that your death protection will stay above a minimum amount, but it’s important to make sure that’s part of your policy before you sign the paperwork.
Term Life Insurance
Term life insurance is the type you probably hear about most — the insurance you can buy for pennies a day and get a guaranteed lump-sum payment after your demise. This type of life insurance works very much like traditional insurance in that you’re paying your premiums for a service. The big difference is that your premiums are not being invested, and your life insurance is only good for a set term.
Young people can get fairly large term life insurance policies for pennies on the dollar — just a few hundred dollars a year can get you a quarter-million dollars in coverage if you’re a healthy non-smoker.
Term life insurance isn’t the best option for older individuals — while the term limits do go up and you no longer have to prequalify every single year, the premiums are higher, and continue to increase as you get older.
Life insurance isn’t as complicated as it sounds, and it’s an invaluable protection for your family if you pass away suddenly — life insurance can be used to cover funeral expenses and pay final bills. If you have a spouse or children, insurance money can help take care of them, as well. If you’re considering purchasing a life insurance policy, we suggest talking to an insurance agent to determine which policy is right for you.