Choosing a life insurance policy can be somewhat daunting, especially if you are new to it and don’t know much about the coverage options. Fortunately, life insurance isn’t quite as confusing as it seems on the surface; on the most basic level it can be broken down into two main categories, and from there into a few simple options. Selecting a policy is much easier when you know how each type of policy works and what it means for you.
Term Life Insurance
The most popular type of life insurance is what is known as term life insurance. As the name implies, you purchase this type of policy for a certain term – a length of time for which the company agrees to provide coverage. Term policies are available in a range of lengths from 5 years up to 30 years with many options in between. The shorter the term ,the less expensive the premium will be since the insurance company is taking on a shorter period of risk.
Term insurance expires at the end of the set time period. You will no longer have coverage at that time. In many cases the policy can be renewed, but you will likely have to undergo a medical exam to determine your state of health and also pay a higher premium since you are older. In most cases it makes the most financial sense to select a term length that suits your needs in the first place rather than having to renew and face higher premiums – or worse, a denial if your health has declined.
Many people select term life insurance based on specific needs – the length of the mortgage on the home, their children reaching adulthood, or any other life milestone after which the coverage may not be as vital. It is an affordable way to get a large amount of coverage.
Permanent Life Insurance
The main difference between term policies and permanent policies is that the latter does not expire and often includes a savings component known as a cash accumulation account. A part of the amount paid in premium each month goes into this account, where it earns interest as in investment. When the policy is paid out either on the death of the insured or less commonly at a certain age (known as the policy maturing, typically at 100 years old), this accumulation account is part of the benefit paid out.
Because this type of policy insures you for a longer time period, it often requires a stricter set of standards for approval and has higher premiums. Once approved, you will have coverage for life and not have to worry about changes to your health that could prevent you from getting coverage later.
Universal and whole life insurance policies are the two most common forms of permanent life insurance. They are very similar, but whole life is more rigid and universal has more flexibility. With a whole life policy the premiums and benefit remain the same over time, while these can be flexible in a universal policy. Universal policies allow you to adjust premium payments and death benefits over time, and have more options than whole policies. It’s best to discuss these options with an insurance professional.
Shopping for Life Insurance: Comparing your Options
Although it’s not the most pleasant thing to think about, shopping for life insurance is something you should not put off. The older you are, the more you can expect to pay on your premiums, and as time goes by you could face health concerns that will affect your ability to qualify for a policy. While many people think about shopping for life insurance when they get married or when their first child is born, there is really no reason to wait. In fact, you will be able to get more coverage for less money to protect that future family if you invest in a policy early.
The best way to select the right policy for you is to obtain multiple quotes and compare the policies. You might get a higher amount of coverage with a term policy for the same price as a somewhat lower amount on a whole or universal policy, but get permanent coverage.
With a number of quotes in front you, it becomes easier to focus on what is really important to you, which could be having a large amount of coverage for a short time, or having a policy in place you won’t have to worry about renewing or changing. And remember that you don’t have to choose between them – many people choose a whole policy and add a short term policy to bolster it, giving the maximum amount of coverage for the years when it is most needed, and still leaving some coverage in place after that time period. To make sure you’re getting the most out of your coverage, be sure to shop around for life insurance.