- Life insurance is a policy you can buy that will provide money for your loved ones after you die.
- There are different types of life insurance available to choose from, depending on your financial needs and budget.
- Coverage can last a set amount of time or for your entire life.
Life insurance can be a blessing for your family when you die, but trying to figure out which are the different kinds of policies and which might be best for you can be daunting. We are here to help.
What are the types of life insurance?
There are two main categories of life insurance–term life insurance and permanent life insurance.
Term life insurance policies are for a set amount of time, generally 10 to 30 years. You pay your premium during that time, and if you die during the coverage period, your family is compensated based upon your policy.
Permanent life insurance lasts your lifetime (as long as you keep paying your bills), so that you have coverage until you die, whenever that might be. In general, these policies are more expensive than term life insurance and can include an investment component, commonly known as cash value.
Let’s take a closer look.
|Main categories||Term life insurance||Permanent life insurance||Permanent life insurance||Permanent life insurance|
|Policy types||Term life insurance||Whole life insurance||Universal life insurance||Variable life insurance|
|Coverage length||Set term, typically 10 to 30 years||Protection for life||Protection for life||Protection for life|
|Cost||Varies, but typically most affordable option||Fixed||Varies||Fixed|
|Cash value benefits||No||Yes||Yes||Yes|
|Tax-free death benefit||Yes||Yes||Yes||Yes|
|Purpose||Replaces income||Replaces income and offers tax-deferred and tax-advantaged financial benefits||Replaces income and offers tax-advantaged financial benefits||Replaces income and allows you to choose how to invest your cash value|
Term life insurance
Term life insurance pays out a set amount of cash, or death benefit, to your beneficiaries if you die while you hold the policy. Coverage is bought for a set amount of time, or term. Those typically range from 10 to 30 years. You might also hear term life insurance called “pure life insurance.” [1,2]
If you outlive the length of your policy’s term, you won’t be able to get back any of the money you’ve put into your policy and your beneficiaries also won’t get any cash.
Term life insurance may be a good fit for anyone who wants to carry affordable coverage for a set amount of time. Many people get the coverage to help their loved ones replace some of their income when they die. It can help cover the cost of raising a child, paying off a mortgage or going to college.
Typically people will make their family the beneficiaries of their policy, but you can also opt to leave your benefit to a friend, put it in or trust or donate it to your favorite charitable cause.
Prices are reasonably affordable and you’ll most likely pay your premium on a monthly basis. Signing up for coverage when you’re younger can help you save as the cost typically goes up as you age. Once you’ve locked in your policy, your coverage and premium remain the same for the length of the policy.
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“Term coverage is similar to renting in the fact that you do not build up any equity in the policy,” says David Radoccia, managing director of Pensionmark Meridien, a Providence, R.I.-based insurance and wealth management firm. “Term life insurance policies are typically less expensive.”
For example, a $500,000 term policy for a 25-year-old may only cost $20 per month and have a level premium for 10 years. The same policy for whole or universal life could cost five to ten times more than that, Radoccia says. There’s a reason for that, which we will get to next.
Permanent life insurance
Permanent life insurance offers coverage for your entire life (as long as you pay the premium!). One reason it’s more expensive than term life is because part of your premium turns into an investment, or as previously mentioned, cash value. You can generally draw on or borrow from that cash value.
There are several options for investments that could include having your money in a tax-deferred account similar to a savings account or having the cash value linked to a stock market index, like the S&P 500. Among the different kinds of permanent life insurance are whole life insurance, universal life insurance and variable life insurance.
Permanent life insurance is for people looking to get extra value out of their life insurance policy may opt for permanent life insurance over term.
A little bit about the different options of permanent life insurance:
Whole life insurance includes a cash value that accrues interest at a fixed rate, and on a tax-deferred basis. The premium is fixed.
Universal life insurance has fluctuating policy rates, death benefits and cash value growth rates over the life of the policy.
Variable life insurance has fixed premiums and allows you to invest in “insurance wrapped investments,” akin to mutual funds. 
How much life insurance do you need?
Deciding on how much life insurance you need to carry, and the type, truly depends on your personal situation. If you’re young and single with no children or assets like a house, you may decide to carry a very basic policy. If you have a family and assets, you may want more coverage.
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Ask the experts
To find the coverage that’s going to work best for your needs and budget, make sure you do your research first. You can talk to your employer about what may be available through your work benefits. You may also want to talk to a lawyer, tax advisor or financial planner.
Choosing a life insurance policy can be difficult, but it can also help give you peace of mind that your loved ones will be financially taken care of.
And remember, even if you already have a policy, it’s a good idea to review your coverage needs from time to time. As you age or experience major life events, like getting married, buying a home, having a baby or retiring, you may want to switch policies or add additional coverage.