Life insurance is rarely considered a fun topic to think about, considering that it forces people to contemplate their own mortality, but it is one of the more important things you should consider, especially if you have a family or other dependents.
Basically, life insurance guarantees a death benefit to any beneficiaries you name if you die while the policy is active. In exchange, the insurance company charges you monthly premiums to keep the policy active. A wide variety of factors can affect your premiums, such as your age and health, the type of life insurance you have, and your coverage amount, just to name a few.
If you’re wondering about the best time to obtain life insurance, the simple answer is as soon as possible. Even if you don’t have dependents yet, it’s still easier to get approved for higher amounts of coverage at lower premium rates while you’re young and have good health. Traditional life insurance companies will have you undergo a medical exam before underwriting approval, as health issues can affect your rates. If you’re not sure what kind of life insurance policy to apply for, here’s a basic guide to the main types.
Term Life Insurance
As the name suggests, term life protects you through an agreed-upon amount of time. Once the term ends, you can opt to renew it, convert it into a form of permanent life insurance, or allow it to lapse. Keep in mind that if you die during a lapse, your beneficiaries will receive no death benefit. As for term lengths, they’re generally offered in increments of ten years (commonly 10-30 years), but you may be able to find some longer-term policies, such as 40 year term life insurance.
It’s possible that you can find term life insurance that can be renewed on a year-to-year basis with some insurance companies, but this will likely be in exchange for higher rates. Speaking of premiums, term life insurance typically offers the cheapest around, so these policies can be a great way to start before converting to a different policy later.
Whole Life Insurance
This is a form of permanent life insurance that also has the ability to accrue cash value. Whereas a term policy offers nothing but a death benefit, whole life, and other permanent policies, typically include a saving component or investing options as well. In addition to lasting for as long as the policyholder keeps up premium payments, whole life insurance is able to build cash value through dividends. A policy owner can also boost the cash value by paying premiums in advance.
Policy owners are able to borrow from the cash value of their policy, or even make a withdrawal if the need arises. It’s just important to keep in mind that any amount borrowed must be paid back with interest, and withdrawals can eat into the policy’s death benefit.
Universal/Variable Life Insurance
Universal life insurance tries to capture the best of both worlds by offering a permanent policy but with cheaper premiums, similar to a term life insurance rate. You’ll have a minimum cost of insurance to keep the policy active, and any other money invested goes into the cash value. These policies also offer flexible premiums, which can be advantageous in certain market conditions, but you’ll need to be aware of rising insurance costs in the future.
With variable life insurance, you’ll get permanent life insurance along with an investment component of subaccounts, which act like mutual funds. You’ll also have the advantage of being able to access your cash value tax-free. While this type of life insurance does offer the highest chances of investment profits, it’s important to keep in mind that market changes make it the riskiest option as well.
Applicants have plenty of choices when it comes to life insurance products. Consider yours carefully to make sure you have the best policy for your needs and your family members.
Interesting related article: “What is Risk Analysis?“