When you are planning ahead for your family, life insurance is a crucial consideration. So many options are available, and it can be hard to determine just what type of policy will best meet your needs. The two main varieties of life insurance are term policies and permanent policies. It is important to understand the features of each as you shop for coverage.
Types
Term life insurance is the simplest type of policy. You pay a monthly premium for a set period, such as 10, 20 or 30 years, and when you die, your beneficiaries receive the face value of the policy. Once you have locked into a term policy, your insurance company cannot cancel your policy unless you fail to pay the premium, according to Insure.com. Permanent life insurance, on the other hand, includes a savings or investment component and so is also sometimes called cash-value life insurance.
Sub-Types
With term policies, you can choose level term, in which the premium stays the same for the duration of the policy; annual renewable term, in which you renew your policy every year and the rates climb; and guaranteed issue, which requires no medical exam to qualify, but costs more than other policies, according to Insure.com. Among cash-value policies, whole life gives you a level death benefit and level premiums throughout your life, as well as a cash-value account that grows. Universal policies are similar, but give you flexibility to increase or decrease your death benefit and to pay premiums for how long and in the amount you want. In a variable life insurance policy, you can invest your cash-value account in any of several funds, with your cash value and death benefit depending on the performance of the investment.
Features
In a term policy, you often, but not always, get guaranteed convertibility, according to Insure.com. That means you can convert your policy into a permanent policy without having to take a new medical exam. Some term policies also allow you, at the end of the term, to get back the amount you have paid in premiums. Permanent policies allow you to, at any time, take out the cash value or take a loan against it. The cash value can also be used to pay ahead on your premiums. With a typical cash-value plan, beneficiaries do not get the cash value, only the face value. But some plans do allow beneficiaries to collect the cash value.
Benefits
For the majority of people, term life insurance works best, according to SmartMoney magazine. For the size of the death benefit offered, premiums tend to be much lower than for permanent policies. Aside from that, the investment or savings aspect of permanent policies tends to be inferior to other ways you could invest the money. According to SmartMoney, "these policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return." Additionally, it is usually difficult to estimate what kind of return you may end up getting in your cash-value account.
Size
Once you have decided on the type of policy you want, you have to figure out how much life insurance you need. Factors to consider include how many dependents you have, how old they are and how much money will be needed to maintain their current standard of living. A simple calculation involves multiplying your annual salary by the number of years your beneficiaries will need support. But Insure.com recommends that you also consider these factors: your funeral expenses and the possibility that you will leave behind medical bills; your mortgage payoff; children's college funds; and the possibility that your family may relocate after your death.
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