The Types of Life Insurance

Although there are more than three types of life insurance, the ones I am going to talk about are the most popular and the least confusing for most people.

 Term life is the simplest and least expensive type of policy. I refer to it as renting insurance. It does not gain cash value and only covers you for a certain amount of time. For example if you lease a home for 12 months you agree to live in the house and pay the rent for 12 months. At the end of 12 months you decided if you want to continue living there or move out. Term life you typically rent for 10, 15, 20 or 30 years. You pay the monthly premium until the end of the term and then you have to renew it. The difference between the house lease and the term life is that you can convert or cancel the life insurance without penalty.  

 Whole life is referred to as permanent insurance, it is also one of the most expensive insurance policies. As long as the premiums are paid it will cover you know matter how old you are. There are whole life plans that can be paid up meaning you pay the premiums for 10 or 20 years or until the age of 65 (length varies by company). You will find that the shorter the payment period, the higher the premium.

 Whole life also gains cash value. The cash value can be borrowed against or used to increase the death benefit. Some people use this type of policy to “be their own lender”. They borrow the money from the cash value to buy things such as a car. They make the payment for principle and interest to their life insurance policy instead of to a bank. It is possible to purchase a whole life policy that you can use this way in a few years, consult with your Financial Advisor to find out if it is something that will work for you.

 Universal life is permanent insurance with lower rates and gains cash value. The cash value can be borrowed against while keeping the death benefit. This type of policy will continue the rest of your life as long as you make premium payments. The premium increases with age and a portion of the premium may come out of the cash value.

 The problem I have seen with this type of policy is that they are underfunded and run out at a critical age. Do not miss understand, this type of policy is a good choice for many people. I do urge you to pay close attention to the illustrations you receive in the mail from your insurance company to be sure it is still providing the coverage you need.  

 Before you purchase life insurance consult with a Financial Advisor to help you determine which type of life insurance best fits your needs and budget.