When it comes to buying life insurance, you have several options. The two main categories are term and permanent life insurance. Each of them can be further divided into different types. With so much choice, it can be confusing and hard to choose, especially if you’re not very familiar with them.
Because it’s such an important investment, you’ll want to make the best choice for your situation. So here is what you need to know when it comes to life insurance.
Term life insurance
This type of insurance, as the name suggests, has a specific term, meaning that it’s limited to a period of time. The time period can vary from one year to 30 years. During this time, the insurer pays a premium and in case of death within the insurance term, the beneficiary will receive the insurance benefits.
Term life insurance is further divided into level term and decreasing term. With level term insurance policies, the death benefit remains the same throughout the whole duration of the policy while with the decreasing one it diminishes each year. Given this substantial difference, most people choose a level term life insurance.
Permanent life insurance
As opposed to term insurances, permanent life insurance assures lifetime coverage. This means that the beneficiary will be paid no matter when the death of the insured occurs.
Permanent insurance can be of two main types:
Whole life insurance: this policy has a fixed premium and comes with a savings account. You can take a loan against the value of the benefit but this will then be detracted from the death benefit. You have three options for paying for this policy: until a certain age, for a certain number of years or a one-time payment.
Universal life insurance: this type of policy allows for more flexibility in the premium you need to pay, as long as you have enough money in the account to cover the costs. Universal insurances also come with a cash value account that you can access and may allow you to increase the death benefit upon passing a medical examination.
There are a few other types of permanent life insurance policies, such as the variable-universal which is the mix of the two above or the survivorship life insurance for couples.
Which life insurance to choose?
When the choice comes down between the term and the permanent life insurance, the most affordable one is the term one. Because of the obligation to pay the death benefit, permanent life insurance has a significantly higher premium and not many people can afford it.
In the longer run, permanent policies can be more convenient because of the guarantee of the benefit payment and the additional benefits such as the cash-value account.
On the other hand, with a term insurance policy, if the insured were to die even one day after the policy term, the beneficiary will not receive anything.
It is useful to keep in mind that the premium is calculated based on several criteria such as age, sex, health conditions, life habits such as smoking, and length of the insurance.
When choosing term insurance, the most common choice is 20-year insurance. If you are unsure about how long you should get insurance for, think about factors such as how long until you pay off your mortgage or until your children will be independent and try to cover that period of time.