Choosing The Right Life Insurance Option

As mentioned above, there are two different popular kinds of life insurance policies: term life and permanent life. 

You should consider term life insurance if:

You’re fine with having life insurance for a set period of time. With term life insurance, you can match the length of the policy to the length of time you need.

Your budget is limited, but you need a large coverage amount. Usually, this type of insurance only pays out if you pass away during the policy term, so you pay less for the policy than for a permanent policy. Just keep in mind that, unlike a permanent policy, you won’t usually build equity in the form of cash savings with term life.

You should consider permanent life insurance if:

You want a policy that doesn’t end after a certain amount of time. Permanent policies pay a death benefit whenever you die, regardless of how old you are or when that is. Unlike term life policies, permanent policies won’t expire.

You want to accumulate savings that will grow. Permanent life insurance can be a source of money to borrow against if you need it. The savings can be used to pay premiums if you can’t pay them otherwise or for any other purpose you choose. Just know that the death benefit is collateral for the loan, so if you die before it’s repaid, the insurance company will collect what you owe before deciding what goes to your beneficiary. 

You don’t mind the higher cost. Premiums are typically higher than the premiums for term insurance, but they can be a great investment depending on your goals and financial situation.

Within the permanent life insurance category, there are multiple different types of policies:

• Whole (ordinary) life offers a death benefit along with a savings account and is the most common permanent life insurance option.
• Universal or adjustable life is a more flexible policy. You can usually increase the death benefit if you pass a medical examination, and the savings account usually earns a money market rate of interest.
• Variable life is a higher-risk, higher-reward policy. Like other permanent policies, it combines a death benefit with a savings account. You can invest your savings account in stocks, bonds, and money market mutual funds. Your policy value may grow more quickly, but it’s riskier. If your investments don’t do well, your death benefit and savings account may decrease (some policies guarantee your death benefit to not decrease below a minimum level). 

Variable/universal life includes the features of both variable and universal life policies — you can adjust your premiums and death benefit, and you get the investment risks (and potential rewards) of variable insurance.