As with any insurance policy, life insurance comes in a variety of forms to suit different people’s needs and budgets. As you consider which type of coverage is right for you, it’s helpful to examine the initial costs as well as future benefits each one offers. The simplest form of life insurance, term coverage, will not provide you with any cash value but will award funds to your beneficiaries in the event of your passing.
The other primary type of life insurance, whole, offers potential financial gains if you decide to borrow from its cash value later on. These two types of policies are the foundation of all other forms of coverage available to you. Depending on your current ability to pay and secondary reasons for getting insured in the first place, you’ll need to decide whether term, whole or universal coverage is right for you.
When Should I Buy Life Insurance?
Contrary to what people think, getting life insurance isn’t just something you do when you’re middle-aged. If you’ve recently gotten married or added a child to your family, then coverage is something that should be at the top of your priority list. Single college students and young adults can also benefit from buying coverage. Because younger people are generally the healthiest, their monthly premiums are extremely low-cost. They can list their parents as beneficiaries to cover the cost of funeral expenses or student loan debt in the event of their passing.
Even if you are young and don’t have any debt, you might start paying toward a policy to build a cash value that you can borrow from later. Many adults start building a nest egg through insurance to rely on later during retirement. It could also be useful if you needed to finance a big purchase, like a mortgage or new car. So, age may not be a factor that stops you from getting covered. Instead, budget should be the largest factor you consider when deciding which type of life insurance you should get.
A term-based policy lasts for a set period of time. After that period expires, you do not receive any money and will have to purchase a new contract to keep your beneficiaries protected. In some cases, people who pay their term premiums for 10 to 20 years are entitled to a return on their payments.
For those interested in solely securing low-cost coverage, this type of policy is the most ideal. There is also the option for annual renewable contracts, which last for one year at a time and can be renewed or adjusted at the end of each term. Single, young adults will benefit from shorter terms, while those who have families of their own will want to consider a longer duration between five to 10 years.
Although they cost more, whole life insurance policies are more desirable for the fact they generate a cash value that you can still benefit from while you are alive. As long as you pay your premium, you are insured until you die. There is also a guaranteed return on investment through the policy’s cash value, and you can even sell your life insurance policy later to make a profit. You can estimate the cost of your life insurance online with Mason Finance in a matter of seconds using this free, online tool. The largest advantage to a whole policy is that the cash value does not affect the death benefit amount. So, if you generate six-figures in value over the course of one or two decades, anything you take for yourself will not deduct from the amount your beneficiaries are set to receive.
You are actually encouraged to take any cash your insurance generates over the course of its lifetime because the residual funds are not extended to your beneficiaries upon your death. They are only awarded the amount you agreed upon at the time of signing your contract; additional money is simply returned to the insurer, which could deprive you and your loved ones of thousands of extra dollars.
As a compromise between term and whole life insurance, universal contracts have little to no cash value but last the entire policyholder’s lifetime and have fixed premiums. The downside to this type of coverage is that you always have to make your payments on time, otherwise your entire policy could be forfeited with no return on what you’ve paid toward it. Some universal types of coverage do accrue a cash value with added interest each month.
This amount does not typically come close to what you can earn with a whole policy, but the trade-off is guaranteed coverage with lower monthly or annual premiums. You ultimately have to consider whether you are more interested in generating a cash value or providing consistent coverage. You can, of course, have both, so long as you are sure that your budget will be able to afford the cost of your premiums.
Can You Change Your Policy?
Some insurers allow their clients to convert their contracts from one type to another. So, if you have been paying for term coverage for several years and want to switch to whole, you may be able to do so without drastically changing the cost of your current premiums. There will, however, always be an increase in the cost to maintain coverage when you switch from a no-cash-value policy to one that does provide financial gain.
Permanent insurance has a guaranteed cash-value amount while term and universal polices have guaranteed death benefit payouts, so long as you stay current with your premiums. For those seeking the greatest opportunity to make a profit while protecting their loved ones, a contract with cash value is recommended. If you’re still not 100-percent sure which option you want to choose, compare the costs with different insurers and match them with your budget. If your income is projected to grow within the next few years, a convertible policy or one you could sell off later is likely the best choice for you.