How to choose the right type of life insurance
Choosing the right type of life insurance can be confusing, but it’s also an important decision. Here are some guidelines to help you find the best life insurance option.
- Think of the term life insurance as…
You need life insurance for a specific period. Term life insurance allows you to match the duration of the policy with the duration of the need. For example, if you have young children and want to make sure you have the funds to pay for their college education, you can buy a 20-year term life insurance policy. Or if you want to insure a loan that is repaid over a certain period, buy a term policy for that period.
You need a large amount of life insurance but are on a tight budget. Generally, this type of insurance only pays out if you die during the term of the policy, so the rate per thousand deaths is lower than a permanent form of life insurance. If you are still alive at the end of the term, coverage will stop unless the policy is renewed or a new policy is purchased. Unlike term insurance, you typically don’t build equity in the form of cash savings.
You can also look at policies with the term “variable” if you think your financial needs may change. It allows you to switch to permanent insurance without a medical examination in exchange for a higher premium.
Remember that premiums are lowest when you are young and increase as you renew as you get older. Some term policies can be renewed after the policy expires, but premiums will generally increase. Some policies require a medical exam to get the lowest rate.
- Consider permanent life insurance as…
You need life insurance as long as you live. A permanent policy pays a death benefit if you die tomorrow or live to be 100 years old.
You want to accumulate a savings element that grows on a tax-deferred basis and can be a source of borrowed funds for various purposes. The savings element can be used to pay premiums for life insurance if you cannot otherwise afford it, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is a guarantee of the loan, and if you die before it is paid, the insurance company collects what the company has to determine what goes to your beneficiary.
- Keep in mind that premiums for permanent policies are generally higher than for term policies. However, the premium of a permanent policy remains the same regardless of your age, while the duration may increase each time you renew it. There are several different types of permanent policies such as whole (ordinary) life, universal life, variable life and variable/universal life. For more details, see our articles on specific policy types.