A lot of things happen in life: education, travel, marriage, children, and work keep you active and busy over the years. So busy, in fact, that you may not have time to think about your life insurance policy.
Most people recognize the benefits of life insurance. A life insurance policy not only protects those you love from financial difficulties after you’re gone, it gives the whole family peace of mind right now. Life insurance also helps your family maintain a healthy standard of living over a significant period in the future.
Unfortunately, many people find life insurance policies confusing. In fact, only six out of ten American adults have a life insurance policy. At the same time, 70 percent of households admit that they would face significant financial hardship if the primary wage earner died.
To close the life insurance gap, consumers need understand more about how common insurance types work. The most important are whole life insurance and term life insurance.
Once you know what each insurance product does, you’re better prepared when you speak with your insurance agent.
Whole life insurance is a blend of insurance coverage and investments/savings plans. So, not only does whole life insurance protect you during your entire life (hence its name), it also invests part of your premium costs each month. Later, you can borrow against this cash value as needed.
A whole life insurance plan also allows three basic options:
- Universal life – A portion of the premium goes to death benefits; the other portion goes to investments or savings.
- Variable universal life – A portion of the premium goes to death benefits; the other portion may be invested in multiple options listed by the insurance company. This makes it more flexible than a typical universal plan.
- Variable life – The bulk of the premium goes into an investment fund. Death benefits vary based on the investment’s performance over time.
While whole life policies offer a host of benefits, they cost more than term policy premiums. Additionally, if you prefer a wide variety of investment opportunities, you may not find the option you need in your insurance policy. Ask your insurance agent.
In contrast to whole life insurance, a term insurance plan covers you for a specified range of years. For example, if you are 30 years old and purchase a 50-year term policy, the plan covers you and your dependents if you die before age 80. Otherwise, you need a longer policy or a renewable option.
Like whole life plans, term life insurance comes in three forms:
- Level (fixed) term – Your premium is the same amount for every year of the policy’s duration. Level policies protect you from premium increases or the cost of inflation.
- Renewable term – Renew your policy annually as needed; however, these renewals are subject to higher premium costs.
- Decreasing death benefit term – If you need a more substantial death benefit when you have a family to support, this policy may make sense—especially if you accumulate a comfortable retirement savings account once your children leave the nest.
Before you can decide if term life insurance represents the right option for you, conduct a “needs analysis” with your family members.
Consider what amount of income your family would need if you couldn’t provide regular income any longer. Talk to your insurance provider about each policy’s payout amount, and weigh the benefits against what you’ll pay each month.
Although life insurance can be a confusing subject, you don’t need to guess about your coverage. Your insurance agent understands all the angles and considerations that you may not think of at first. Take the time to speak with your agent about the coverage that’s best for you now and long into the future.