• Types of Life Insurance

Another factor to consider — aside from how much insurance you need — is what life insurance options are best for you and your family members. The two primary differences between these types of life insurance policies are the length of coverage over your lifetime and the potential to increase your death benefit over time via cash value.

Permanent life insurance policies

Permanent policies remain in effect for your entire life (or at least as long as your premiums are paid). They also offer the benefit of building cash value. While often used interchangeably with “whole life insurance,” cash value life insurance also encompasses other permanent life insurance policies such as universal life insurance.

With cash value life insurance, a percentage of every premium payment you make is diverted as tax-deferred cash value that accrues interest at the rate specified on your policy. This is separatefrom the death benefit and is available to be used while the policyholder is still living. Beneficiaries should not expect to receive both in the event of the policyholder’s death. Think of it as a savings account built into your whole life policy.

There are several benefits to cash value life insurance including:

  • It can be withdrawn tax-free as long as you keep paying for your policy and don’t surrender it.
  • It can be used to take out a low-interest loan against your own policy. Like other loans, you must pay interest until it’s paid off if you access cash value this way. Any remaining amount owed after you pass will be deducted from your death benefit.
  • It can be paid out if you surrender your life insurance policy. However, many life insurance companies charge a fee for this, and it may not be worth it if your policy is only a few years old — most of the growth in cash value happens the longer your whole life insurance policy matures, generally beyond 10 years old.

Universal vs whole life insurance policies

The two most common options for permanent life insurance policies are universal life insurance and whole life insurance. The main difference between universal and whole life insurance policies is that the cash value is associated with a specific stock index instead of a fixed percentage. This leaves your cash value vulnerable to decline if the financial markets underperform.

Universal life insurance is often best:

  • If you prefer flexibility and customizability. Universal policies offer a more customizable and adjustable insurance policy as well as flexibility in premium payments, death benefit amounts, and investment options.
  • If you are interested in potential cash value growth tied to various investment options.

Whole life insurance is often best:

  • If you value simplicity and security. Whole life insurance offers a more straightforward policy structure with a guaranteed death benefit, fixed premiums throughout the life of the policy, and the security of a conservative and predictable investment component.
  • If you want lifelong coverage and potential cash value growth.
  • If you are saving for retirement, caring for lifelong dependents, or have a high net worth.

Term life insurance

A term life insurance policy only covers you for a set number of years and is considered the most basic level of life insurance coverage you can buy. If you’re lucky enough to still be alive once the term policy expires, you must renew to keep the coverage in place and guarantee your beneficiary gets your death benefit once you do pass. Term life policies tend to be the cheapest type of life insurance. Most group life insurance plans include term life policies.

Term life insurance is often best:

  • If you have a limited budget. You may require a higher coverage amount for a lower premium than permanent life insurance options offer.
  • If you just want pure protection.Some would rather use an investment option offering a historically higher return.
  • If you anticipate a decrease in financial obligations over time.For example, those with mortgages or outstanding loans that only need coverage for a specific period, young families, or parents.
  • If you have temporary dependents.It is often wise for young families or parents to ensure income replacement and protect their children’s future educational expenses until their dependents become financially independent.
  • If you are younger or require coverage for less than 15 years.

Final expense insurance

End of life insurance, also known as final expense or burial insurance, is a type of life insurance designed to cover costs like funerals, medical bills, and other end-of-life expenses. It typically offers smaller coverage amounts (around $5,000 to $25,000) and has a simplified application process, often not requiring medical exams. Premiums are usually fixed, and the policy lasts for the policyholder’s entire life. Some policies may have a cash value component, and beneficiaries receive the payout to cover final expenses. These policies are affordable and help relieve financial burdens on loved ones.