Life insurance should be chosen based on many different considerations; most importantly who it will protect financially in case of your death.
Life insurance can provide your spouse and family with financial security when something untoward happens to you, including housing, food, utility bills and outstanding loans. It may also prove useful for small business owners, retirees and those caring for dependent children.
Term Life Insurance
While life insurance purchase decisions vary for each person, most want to relieve their loved ones of financial stress in case of death. This may help pay off debt, cover funeral costs and replace income. Term life is typically the most cost-effective solution and also offers the benefit of switching into permanent coverage with no extra costs if needs change over time.
Before deciding whether or not to purchase term life insurance, carefully consider how much your family would need in the event of your death. Include all short and long-term financial obligations like debt repayments, mortgage payments and tuition payments when considering this decision. Furthermore, think about how they’d cover day-to-day expenses like housekeeping and childcare without you present.
Rule of thumb should be to buy an insurance policy which will pay off debts and provide your family with enough income for several years, particularly important if there are children involved as the loss of one spouse could have severe repercussions financially for both partners.
Consider also that, should you decide to end your policy early, it may become impossible or very challenging to find another policy later if your health worsens. To mitigate this possibility, select a guaranteed or simplified issue policy which does not require medical examination but instead asks only simple health-related questions about you and your status.
While those with significant wealth may choose not to purchase life insurance, experts agree that families with young children should strongly consider life coverage. Furthermore, homeowners should make sure their policy can pay off their mortgage in case of their death; those with outstanding student loans or significant credit card debt should add term policies; finally those facing terminal illness or any unforeseen circumstance should purchase life insurance and use NerdWallet’s Life Insurance Calculator to determine how much coverage is necessary.
Whole Life Insurance
Whole life insurance is a form of permanent life insurance that offers death benefit protection throughout your lifetime. Although more costly than term policies, whole life offers advantages like guaranteed death benefit coverage and cash value accumulation at a steady pace over time. Furthermore, this type of policy typically requires a medical exam for eligibility considerations.
Life insurance provides your beneficiaries with a lump sum death benefit upon your passing, helping to cover immediate expenses as well as future financial needs such as retirement planning or tuition payments for college. In addition, life policies also accumulate cash value over time that can be invested or borrowed against during life based on premium payments made plus interest and dividend earnings.
Whole life policies are the most popular permanent life insurance products. There are various kinds of policies available, including level premium whole life and universal life. Level premium whole life policies feature fixed premiums that remain constant over time while universal life policies allow you to adjust both death benefits and premiums according to individual needs.
Whole life insurance offers more than just guaranteed death benefits and cash value accumulation; it also comes with other advantages. These may include purchasing an add-on rider to extend coverage beyond death, borrowing against its cash value or borrowing against any outstanding loans/withdrawals to reduce death benefits for beneficiaries. However, outstanding loans or withdrawals could significantly diminish this final benefit for them.
Most people view life insurance as necessary only to protect the financial futures of loved ones after the death of a breadwinner; however, its applications extend far beyond this simple role. Life policies not only offer death benefits; they can be used as collateral against bank loans or home purchases with their death benefit helping offset or cover all monthly mortgage payments in some instances.
Universal Life Insurance
Universal life (UL) policies offer greater flexibility than whole life policies, allowing you to adjust both death benefit payout amount and premium payments at will. They also accumulate interest tax-deferred, similar to savings accounts. Furthermore, your cash value may even accumulate while you’re alive for borrowing purposes if necessary. But these features come at a price: due to their increased flexibility UL policies typically have higher premiums than their whole life counterparts.
Indexed universal life insurance (IUL) policies offer flexible premiums and death benefits with growth tied to stock market index performance. Like any investment product, however, this form of life insurance poses risk and incurs fees that other permanent life products don’t entail.
IUL is ideal for individuals who seek long-term solutions but don’t require the security offered by whole life or variable universal life policies. Individuals choosing IUL should be willing to regularly review their policies with their agent or financial professional to make sure it remains on course.
Variable Life Insurance
Variable Universal Life (VUL) insurance combines elements of both whole and universal policies into a single permanent life policy, including being able to adjust premium payments and death benefit amounts within certain parameters. Furthermore, VUL may provide higher investment growth potential than other forms of permanent life policies.
Variable life policies offer greater investment flexibility than other permanent policies by enabling you to allocate portions of your monthly premium among various investment subaccounts that you select yourself – providing greater control than other permanent policies. Please keep in mind, though, that this doesn’t guarantee a specific rate of return; actual results could differ based on market conditions.
VUL offers holders another advantage in that they can borrow against their death benefit to meet financial needs, although this can reduce the cash value account and increase likelihood of policy lapse. If they don’t pay back the loan by their death date, the amount borrowed will be deducted from their final death benefit and could even incur federal taxes on its withdrawal.
Your policy needs a sufficient cash value after subtracting policy fees and charges in order to stay active; otherwise, its coverage will lapse and you could incur surrender charges.
Your policy’s fees and charges typically include agent commission, setup and maintenance costs, ongoing management and operations expenses of your insurer as well as transaction fees related to moving money between investment options or partial withdrawals or providing additional reports. Your net amount of risk influences certain charges; as such a higher cash balance will help decrease fees & expenses burden.
If you’re thinking about adding permanent life insurance to your financial strategy, consulting with a financial professional is wise. They can explain how different types of life insurance work while taking into account your unique situation and suggesting suitable coverage options.