Many people understand the importance of life insurance for the dependents they leave behind. However, when it comes to choosing the specific life insurance policy that is right, many of us get confused by all the options available. The basic concept of life insurance is the same, but there are differences that make each policy unique.
Understanding what you stand to gain from each type of life insurance policy makes it easier for you to choose a policy that is suitable. We look at the various life insurance plans and the main differences between them.
Whole Life Insurance
Whole life insurance guarantees payouts throughout your life as long as you honor all your premiums. It is the only type of life insurance plan that is not capped at a given number of years. The payouts can be made at intervals or after your passing, depending on the terms of the policy.
In addition to guaranteeing you payouts, whole life insurance also attracts a cash value, against which you can borrow.
The biggest disadvantage with whole life insurance is that it has much higher premiums.
Term Life Insurance
Term life insurance promises a specific amount in payout to your beneficiaries if you die within a stipulated time. If you do not die within this period, the policy expires and you don’t receive any benefits.
Most term life policies range between 5 and 30 years. It has lower premiums than whole life insurance.
This type of life insurance cover may be an ideal choice for people who plan to engage in high risk undertakings with a low survival rate.
The simple principle it’s based on, that of payout after death, gives you assurance that if you die during your adventure, your beneficiaries will receive the outlined benefits. You only have to ensure that your premiums are up to date at all times. Failure to submit even a single premium can void the policy, disqualifying your beneficiaries from getting any payout.
Term life insurance is usually only available for younger people.
Convertible Life Insurance
A convertible life insurance starts off as a term life insurance policy, but is later converted to a whole life policy. With this option, you retain the policy even when existing term life insurance expires.
The biggest advantage a convertible life insurance policy has is that it does not require you to have a medical exam to qualify for theconversion to whole life.
However, there may be a limit beyond which the policy can no longer be converted. This is its greatest shortcoming.
Variable Life Insurance
Under variable life insurance, you decide where your premium is to be invested. You can choose to invest in money market funds, stocks or bonds. The cash payouts and death benefits are determined by the performance of the linked portfolios.
If you’re very knowledgeable about a given portfolio and believe your beneficiaries can get good returns from it in future, you may want to consider this option.
The biggest disadvantage with this type of life insurance is that you don’t know the amount of payout your beneficiaries will receive following your death.
The fluctuating nature of the investment market also makes it sort of a gamble.
Some insurance companies allow you to pay extra for your beneficiaries to get a guaranteed amount in payout.
Universal Life Insurance
A universal life insurance policy is permanent. Its main advantage is that it allows you to adjust the premiums and the insurance payout following death.
They attract lower premiums and these are also flexible.
The policy accumulates cash value, against which one can take out a tax-exempt loan. You may also withdraw the cash, but this option is not tax exempt. The insurer retains any cash value remaining in your account after your death, and only pays out the death benefits.
However, the specific terms applicable to each insurance plan may differ. Some universal life plans require a one-time premium payment while others require scheduled fixed premiums.
All these differences will influence the amount you pay in premiums.
Which Factors Determine your Life Insurance Cost?
The amount any single individual pays in life insurance premiums can be significantly different from what someone else pays under the same policy. This is influenced by different factors, the most common of which are:
- Duration of the policy
- Death benefits guaranteed
- Your age
- Your lifestyle
- Your health
These are the factors an insurance company considers when issuing a life insurance policy. An individual who is relatively young may end up paying more premium than an older person if they lead a high-risk lifestyle. The older personwith a low-risk lifestyle and in good health is viewed as a safe bet, hence the lower premiums.
What should you consider when choosing A Life Insurance Policy?
Analyze your individual life situation to find out how much cash in death benefitsyour beneficiaries would need to maintain their current lifestyle following your demise. This gives you a clear idea of the total figure to work with.
Factors that influence the amount of insurance to take include:
- The number of dependents
- Age of dependents
- Any serious illnesses among dependents
- Expected amount in death benefits
- Whether your beneficiaries will be eligible for Social Security survivor benefits.
The more the number of dependents, the more insurance you need to buy. If most of your dependents are young, you’ll need more insurance for the benefits to caterfor their upbringing, college fund, and related expenses.
If your dependents have to manage a serious illness, the payout should be able to cater for this extra expense too. This means buying a higher amount of insurance.
If your beneficiaries will receive Social Security survivor benefits, you can buy a lower amount of insurance. The SS benefits coupled with the death benefits of your policy will add up to a significant amount.
Calculating how much life insurance you ought to buy is not so hard when you understand the concept behind each plan. Should you still have questions about any plan you’re considering, talk to an insurance expert for further clarification.