Life insurance is a valuable and necessary protection for anyone with long-term financial commitments, whether those commitments are tied to debt, dependents or spouses. There are a few options when shopping for life insurance, and it's important to understand the plan you purchase before making the investment. Making the wrong purchase could lead to costly plan cancellations.
Term insurance
Term is the simplest form of life insurance. You purchase a plan to cover a specific period of time, usually in conjunction with certain debts you would like to be covered in the event of your death, such as student loans or mortgages--debts that will eventually be reconciled and paid off. A term plan covers this period of time and gives you the option of adjusting your coverage (and premium paid) at the end of the term by continuing with another term plan or purchasing a new plan altogether.
Permanent (cash value) insurance
Permanent plans provide coverage across the entirety of your life without exceptions. They offer a fixed rate but also come with hefty cancellation fees should you choose to go with a different plan. A major benefit of permanent plans is that you can use them as a cash asset--as you make payments over time, they acquire a cash value and can be used as collateral.
Variable insurance
Variable policies use broad investment options and investment returns to defray the cost of insurance premiums. The capital gains from those returns can sometimes offset premium costs, otherwise they can be used to fund the life insurance account and be dispersed in addition to the face value of the account when necessary.
Universal insurance
Similar to a variable insurance plan, universal policies let the policyholder decide how they want their contributions invested, although they are usually restricted to mortgages and bonds. Typically, the funds invested are any money provided above the minimum premium. The earnings off these investments, like a variable plan, can be reinvested into the account and dispersed upon death. The payout of accrued interest is intended as a defense against inflation, but the premiums for this option increase over time as you age and inflation becomes less of an obstacle given the proximity of death.
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