What Are the Different Types of Life Insurance?
To choose the right policy for your needs, you need to understand the two main types of life insurance: term and permanent.
PolicyPals team
Published November 7, 2020.
In today’s world, it’s even more essential to focus on protecting your family. All life insurance pays out in the event of your death, but what about before?
We can categorize life insurance into two types: term and permanent.
Key Takeaways
- Term insurance is a type of life insurance that you purchase for a set amount of time
- A permanent life insurance policy doesn't expire: you will be covered for your entire life.
- Whole life insurance is a type of permanent insurance that lasts your whole life and includes a built-in saving component.
- A beneficiary is the person you designate to receive the death benefit lumpsum.
Term Life Insurance
Term insurance is a type of life insurance that you purchase for a set amount of time, generally between 10 and 30 years. These policies pay out the designated death benefit if you die during your policy period.
If you buy a 30-year term life policy of $100,000 when you are 20, you will pay the same premium amount every month or year until you are 50. If you die in that time frame, your insurance will pay $100,000 to your beneficiary (the person you decide to receive the money). Otherwise the policy will expire when you reach 50, and you can choose to purchase another term policy or review other options.
Term life insurance is fantastic if you need a lot of coverage to cover your debts or replace income if you are a primary breadwinner for your family. Despite that this type of policy does not build any cash value, it is very affordable which makes it an ideal choice for young families and professionals.
Permanent Life Insurance
Permanent insurance, unlike term, does not expire. When you buy a permanent policy, you have it for the remainder of your life. There are several types of permanent insurance.
Permanent life insurance is when you pay a premium for the rest of your life. Those payments cover not only the death benefit, like in term life insurance, but they also build cash value within the policy. If you ever needed a loan, you could take some of your cash value out of your policy with interest. Usually, though, the insurance company would pay your beneficiary the cash value along with your death benefit. A few examples of permanent life insurance are whole life and universal life.
Whole life insurance is typically more expensive than term policies. However, this is still a particularly good option when you need less coverage but still want a lot of value accumulation, making it an exceptionally good option for retirees.
Universal life insurance is another type of permanent life insurance that offers an investment savings element, in addition to low premiums.
Another option for permanent life insurance is limited pay. Like whole life, this policy will accumulate cash value, but you only have to make payments for the premium over a certain amount of time. Limited pay is a good option for children. Once premiums are paid, you can give them a life policy as a gift that will only grow, making it a valuable and practical gift.
Final expense policies are smaller permanent life insurance policies. These policies are designed to cover funeral expenses and are often bought in a lump sum by seniors. They offer reassurance that your family will not struggle to pay for a funeral while grieving. These generally do not build cash value because of how they are packaged.
For other questions on how you can bundle or optimize your life insurance experience, talk to your agent.