Choosing The Best Type Of Life Insurance

Choosing a Life Insurance Policy

If the worst were to happen to you, what would happen to the security of your family’s financial future? This is a sobering thought, and one that you’ve undoubtedly seen dramatized by television commercials over the years. The truth is that without life insurance, your loved ones will be subjected to financial hardships and burdens, especially when you consider that the cost alone of the average funeral in the United States is approximately $6,500.

There are two basic types of life insurance, and three key types of permanent life insurance that you should consider when weighing your options. This article is designed to provide you with information on these types, but is in no way intended to be a substitute for sound advice from an experienced and certified financial planner.

The two most popular types of life insurance are:

• Term Life Insurance

• Permanent Life Insurance

The three key types of permanent life insurance that you should consider are:

• Whole Life

• Universal Life

• Variable Universal Life

Term Life Insurance

Term life insurance is considered to be the simplest type of life insurance available, in part because it requires the smallest cash outlay. Term life Insurance is designed to provide life insurance protection for a specified period of time, such as ten years. A variation of Term Life Insurance, Yearly Available Term is also available. With Yearly Available Term, the premiums change each year, and you can typically renew your policy at the end of a term without providing evidence of insurability, but the premium is also likely to increase with each policy renewal.

What Are The Benefits and Disadvantages of Term Life Insurance?

The disadvantages of Term Life Insurance, such as short-term coverage, and increasing premium renewable costs, have already been mentioned in the above paragraph, but the following is a list of additional benefits, as well as disadvantages, of Term Life Insurance:

• Death Benefits: A death benefit is paid to the beneficiary if the insured dies while the policy is in force

• There are no benefits paid at the expiration of the policy, or if the insured dies after the expiration of the policy

• Term insurance, because it requires no long-term commitment, is generally purchased by those with a temporary need for life insurance, or by those with limited financial needs.

Permanent Life Insurance

Permanent life insurance is designed to provide life insurance protection for the life of the policy-holder, and a permanent life insurance policy can also accumulate a cash value—money that can be withdrawn or borrowed, with favorable tax treatment in many cases.

What Are The Main Differences Between The Types of Permanent Life Insurance Available?

There are various types of permanent life insurance products available, with the main difference between them being:

• The flexibility of premium payments

• How the cash value is invested

• The death benefit guarantees

What Are The Benefits and Disadvantages of Whole Life Insurance?

Whole life insurance is a popular choice among policy holders, for many of the reasons that you will see below, but keep in mind that as with any type of policy, there are both disadvantages and benefits, including:

• With Whole Life Insurance, the policy does not expire as long as premiums are paid

• Whole Life Insurance does not require renewal

• The face amount of insurance and the premium are fixed and do not vary

• Premiums are typically due each year for the life of the insured, but whole life insurance policies often pay dividends, and you can typically choose how to apply them subject to the terms and conditions of the policy. Typically, dividends can be used to either pay premiums or purchase additional life insurance coverage

• Dividends are not guaranteed, and if they are reduced or discontinued, you may have to pay the scheduled premium payments to keep the policy in effect..

• Whole Life Insurance often appeals to individuals who are seeking a level premium, a fixed benefit, and a cash value. All guarantees are based on the claims paying ability of the issuing insurance company.

What Are The Benefits and Disadvantages of Universal Life Insurance?

Universal Life Insurance is designed to offer more flexibility than Whole Life, which makes it a good choice for individuals who like the option of changing certain policy aspects over time. Some of the disadvantages and benefits of Universal Life Insurance include:

• You are allowed to change the timing and amount of premium payments

• You are permitted to make lump sum payments (subject to tax limitations)

• Your payments are applied to cash value, which earns an interest rate declared by the insurance company. The cost of the death benefit and administrative costs associated with the policy are deducted, typically monthly, from this cash value.

• The interest rate credited to the cash value is subject to change

• Most Universal Contracts offer you a choice of death benefit, usually either the death benefit selected, or the death benefit selected plus the accumulated cash value

What Are The Disadvantages and Benefits of Variable Universal Life Insurance?

Variable Universal Life Insurance works similarly to Universal Life, offering the same flexibility, in most cases. There are, however, some disadvantages and benefits associated exclusively with this type of insurance plan:

• Your payments are generally applied to the cash value, which fluctuates based on the performance of the investment options that you select. The cost of the death benefit and any administrative costs are typically deducted from this cash value.

• As with Universal Life policies, Variable life contracts typically offer you a choice of death benefit.

• You are usually allowed to change the death benefit, although any increases may require evidence of your health.

Choosing a Life Insurance Policy: Providing Protection for Your Loved Ones

Now that you are more fully informed as to the basics of life insurance options, your next step is to make an appointment with your financial advisor in order to determine which option is the best for you. Remember that your certified financial planner has experience with these types of policies, and will be able to sort through the legalities to assure your families peace-of-mind and financial security in the event that you become unable to provide it directly.