What kind of life insurance should I buy?
Not all life insurance policies are the same. There are four basic types of life insurance available: Term Life Insurance, Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance. These products generally fall into two different categories: protection policies and investment policies.
Protection Policies
Protection policies offer pure income protection to replace the income you would have made during your working years should you die unexpectedly. An example of a protection policy is term life insurance. Term life policies expire at the end of the agreed upon term and are not permanent, however almost all term life policies can be converted to a permanent policy such as whole life, without being required to participate in another medical exam.
Investment Policies
Investment policies build cash value over time by allowing your premium payments to accumulate interest through investment performance. An example of investment policies are whole life, universal life, and variable life insurance policies. As you pay your monthly or annual premiums, the insurer invests a portion of these payments which is what allows them to build cash value.
“Here & Now” Needs vs. Long Term Needs
When choosing the right policy to match your specific needs, determine if your goal is to protect the “here and now” or if you are focused more on long term needs. If you’re looking to protect your current income and cover all of your current debts, a term life (protection) policy is best. If you are looking further down the road and are concerned with your long term needs, a whole life or universal life (investment) policy would be best.
Below are a few specific examples of common needs for life insurance:
Leaving Inheritance
If you want a life insurance policy to assure you’ll be able to leave your loved ones an inheritance regardless of how long you live, a permanent investment policy would be best. A permanent policy such as whole life or universal life will build cash value over time. The amount of money that you accumulate through premium payments can then be paid out to your beneficiaries after your death, along with the death benefits.
Making Sure Your Children Are Cared For
If you are worried about providing guaranteed income for your children in your absence, a term life policy would be your best option. Term life policies are designed to make up for the income that you would have made during your working years. After your children grow up, your needs may change. At that point, you can consider converting your term life policy to a whole life or choose a number of other policy options.
Building a Savings
If you are looking to purchase a life insurance policy in order to build savings, a permanent investment type policy that builds cash value is best. Whole life and universal life policies can be a part of your investment portfolio, since a portion of your premiums will be invested by the insurer, increasing the policy’s value over time. Although these types of insurance policies do not perform as well as other investment tools such as an IRA, if you need to purchase life insurance coverage they at least build some value.
Covering Your Debt (Mortgage, Student Loans, Medical Payments, etc.)
If you are looking to purchase a life insurance policy to cover the debts you have now, such as a mortgage, student loans or car payments, a term life policy may be your best option. Debt is often temporary and after a number of years the need to cover those debts may no longer be there. At that point, a variety of other policy options are available.
