How do you choose the right life insurance policy for your specific situation?
What options and features should you consider?
Do I even need life insurance in the first place?
Life insurance comes in various shapes and sizes. Understanding how life insurance works and all of your options can be somewhat confusing. How do you choose the right life insurance policy for your specific situation? What options and features should you consider? You may even wonder if you need life insurance in the first place.
Put simply, if others depend on you—financially or through your efforts—an appropriate life insurance policy can offer meaningful protection in the event of your death. Replacing income, covering funeral expenses, and managing recurring bills can burden your loved ones as they deal with the emotional aftermath of your loss. For many, the main draw of a life insurance policy is the death benefit it offers.
However, the utility of life insurance can go beyond a death benefit. With permanent life insurance, the policy gathers cash value that can be accessed through loans and withdrawals. Additional features—such as a long-term care or chronic illness rider—can allow you to receive benefits should you face a qualifying debilitating condition. Permanant insurance can also have attractive tax benefits, such as tax-free growth, tax-free exchanges, and, in general, no income tax to beneficiaries.
Beyond its applications for individuals, life insurance may also be a helpful tool for business owners. Structures such as key person arrangements, 162 executive bonus plans, and buy/sell agreements often use life insurance.
Life Insurance Types
Life insurance generally falls under two main categories: term life and permanent.
Term Life Insurance provides coverage for a specified timeframe (term). This is typically in ten-year increments. Should you die within the covered period, your beneficiaries receive a death benefit payout. If, however, you survive the term, your coverage terminates. At the end of a term you may have an option to renew for another term, or convert to another policy type.
Individuals seeking a death benefit—and nothing else—may find that a term policy meets their needs. Since a term life policy does not gather cash value, it is often the least expensive insurance available to consumers.
Permanent life insurance policies provide lifetime protection, as long as premiums and contract charges are met, per the condition of the policy. This broad category of life insurance offers tax-deferred cash value and flexibility.
There are three main versions of Permanent Life insurance:
Whole Life Insurance provides coverage for your entire life, with a guaranteed rate of growth for the cash value component.
In addition to offering lifetime coverage, universal life insurance policies allow for flexible premium payments (as long as enough is paid to keep the contract in force) and the option for a level or increasing death benefit.
A fixed universal life insurance policy is very similar to a universal life policy, with the difference that the cash value is tied to either current interest rates or fixed to stock market index, such as the Standard & Poors.