Life insurance is essentially a safety net to help your loved ones after you are gone. In exchange for your premium payments, the insurance company agrees to pay a lump sum to your beneficiaries in the event of your death, which can then be used to help pay off various loans or mortgages, or even to just take care of everyday bills.
The process of buying life insurance can be complicated and confusing. Unfortunately, while buying a life insurance policy, most Americans overlook the fact that there are a wide variety of life insurance options available and do not do the necessary research to determine the best type of life insurance for them. As a result, they end up buying policies that give them limited benefits and not what they actually need.
Let’s take a look at some of the main types of life insurance policies:
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1. Term life insurance
This is the most basic type of life insurance available. It gives coverage in the event of the policyholder’s death, but it doesn’t provide benefits during the person’s lifetime. A term insurance plan can be purchased for a pre-decided tenure, usually ranging between 10 and 30 years. The policy can be renewed once the period is complete, but the premium may be higher given the applicant’s advanced age. Some life insurance plans can also be converted into permanent plans. This type of policy is commonly purchased by younger people and has a relatively cheap premium. However, this isn’t the right life insurance for people who want to enjoy the benefits of the plan during their lifetime.
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2. Whole life insurance
This is one of the simplest life insurance plans to understand and one of the most common types of life insurance that people choose. In whole life insurance, the premium amount stays fixed for the entire duration of the policy. Even as a person ages, the premium stays the same. Whole life insurance plans then provide cash benefits to the beneficiary in case of the policyholder’s death. Some whole life insurance plans also pay back dividends to the policyholders during their lifetime. While this is not very common, you can look for a plan with dividends as an added advantage.
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3. Universal life insurance
A little more flexible than whole life insurance, universal life insurance provides a cash-value account and a set rate of interest to the holder. It is at the discretion of the policyholder to withdraw or borrow, as decided in the policy, against the funds when they need it. This type of life insurance policy also gives the holder an option of adjusting the amount that will go to their death benefit and the amount that goes to the cash value. This can be particularly useful during retirement, especially during volatile economic situations.
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4. Survivorship life insurance
In this type of life insurance, there is more than one person covered under the policy. In some cases, the policy is paid out when only one person passes away. In other cases, it gets paid out when the second person passes away. The main advantage of a survivorship life insurance policy is that it is cheaper than taking out two separate policies. It also has less strict underwriting if one of the policyholders is in good health.
