Oct. 12, 2020
What is Life Insurance and how do I choose?
There are different types of life insurance, but it's hard to choose the right one. If you have a car or home, then you need to have auto or home insurance. You can even have insurance on your cell phone. So, then it makes sense to have life insurance to protect your family, right? If you are making plans for your family's future, then you should consider getting coverage. However, there are many choices in terms of life insurance rates and policies. With all the available options finding the right life insurance policy can be confusing. So, we start to think about the question,
What exactly is Life Insurance?
Life insurance is a contract between an insurer and a policyholder. In this contract, both parties are legally bound to each other. The insurer guarantees to pay a tax free amount upon the insured’s death in exchange for the premiums paid by the policyholder.
Life insurance for young people is of the utmost importance. So, before deciding anything, do in-depth research to choose the right type of policy for you. There are two main types of life insurance, and all other categories fall under these.
- Term Insurance
- Whole Life Insurance
Term life insurance is available in lengths of 1,5,10,15,20,25 or 30 years. It is a simplified form of life insurance for young people. However, the company only pays the amount when the death occurs during the term of the policy. Most term policies have no other benefit. So, this is the basic type of Life Insurance.
- Level term: It means that death benefits stay the same during the whole policy term.
- Annual renewable: It is a one-year policy that renews every year. However, it is suitable if you have short-term debts or need coverage for a short period.
- Decreasing Term: Used mainly for Mortgage Insurance. As the Amount of the Mortgage Decreases, the amount of the face value of the policy also decreases.
Pros & Cons of term life Insurance:
Pros: Term life insurance is the cheapest to buy. Furthermore, this is also the easiest type of Life Insurance to qualify for.
Cons: If you live longer than the term you won’t get any return for your payments. However, you had the coverage during the time of the contract.
As the name implies, it will typically last until your death, as long as the premiums are paid in a timely manner. If you are looking for a type of life insurance that is "set it and forget it," that term usage wouldn’t be wrong. The life insurance rates stay the same, and you get a set amount as the death benefit amount.
Pros: it covers the whole life of the policyholder and builds cash value.
Cons: Usually, it is more expensive than other types of life insurance policies.
According to the Life Insurance American Council, in 2016, about 4.3 million bought Term Life policies. Furthermore, about 6.4 million chose a whole life insurance policy.
Some other types.
Apart from the above types, there are many other sub-categories that you could consider. Remember to always choose the plan that goes along with your needs.
- Universal Life Insurance: The death benefits are guaranteed and the premium rates are the same, but there are other payment options that are available.
- Indexed Universal Life Insurance is a type that links the cash value with the stock market index. However, there can be gains in the value, usually without the fear of loss of value.
- Variable and Variable Universal Life Insurance: The cash value ties to an investment account, like bonds or mutual funds. The death benefit remains the same despite the markets condition.
- Group Life Insurance is usually through a company's workplace benefits. The premiums are decided on a group basis instead of an individual basis.
- There are many other types of Life Insurance policies available, the chart below will show some examples.
In closing some of the various features.
Term-Life Insurance: Life Insurance that covers you for a fixed amount of time.
Whole Life Insurance: Life Insurance that covers you for your whole life.
Universal Life Insurance: This usually is a policy that will cover you for life and it also accumulates cash value, but the premiums are flexible depending on the value in the policy.
Return of Premium Life Insurance: This Life Insurance will return all or a portion of your premium depending- on how long you have had the policy.
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