If you are looking for a life insurance policy, it can be hard to pick the right option since there are so many to choose from. However, knowing more about your options can help you make the right choice. The two main types are permanent and term. Know that your decision does not have to be final once you have made it.
What if You Choose the Wrong Type?
A term policy only lasts a certain number of years. However, permanent policies last for your lifetime as long as you keep paying the premiums. You might be hesitant to choose permanent policies in case you decide later on that you no longer want the coverage. The good news is that you are not locked into holding onto a policy you no longer need. You always have the option to sell it through a life settlement. If you are thinking about this at some point, you can review a guide from Mason Finance that explains everything you should know about selling.
What Can Cash Value Do?
Your beneficiaries are not the only ones who can benefit from the cash value of your policy. Of course, you will need to wait a while for the amount to grow to a helpful level. But once it has, you can borrow against it and use the funds to help pay the premiums. If you no longer need the coverage, you can use the cash value during your retirement. This is one of the common money habits of successful people that you can adopt yourself.
You can sometimes get dividends from the cash value, depending on the company. The insurer will send you a portion of the profits, and you can use this to increase policy value. It also offers some other advantages, but these would be determined by the insurer. It is important to read the fine print before committing to anything, so you know what you are getting.
Understanding the Basic Features of a Policy
Getting coverage involves receiving a promise from the company. They will offer financial assistance to your family if you suddenly pass away. Typically, a death benefit is involved, and this is a certain amount of money the company will provide your beneficiaries with if you pass away. Usually, they will not need to pay income taxes on the amount.
You can choose to have the benefit go to one or more individuals, such as your kids or spouse. You don’t have to have your family be the beneficiaries, however. You also have the option to have the money go toward an organization or other individuals. You can work with an estate planner and get all your questions answered as well as have to help decide how to divide up the death benefit. For example, perhaps your adult children will receive half the benefit in total and another half will go toward your favorite organization. Make sure to communicate this to any beneficiaries beforehand to avoid any hurt feelings or misplaced expectations.
Term vs. Whole
There are several key differences between term and whole coverage. For example, whole lasts throughout your life, but term only lasts for a set number of years. Your beneficiaries will no longer receive the death benefit once that amount of time is over. Term also has no cash value after its expiration date. Still, you can sell it during the term if you need the funds. One of the advantages of doing this is that you can prevent your policy from going to waste. Of course, the amount you receive will be determined based on the amount of time left and the death benefit it will provide. Make sure to do your research before making any decisions on what to do with your own coverage.
Understanding Term Insurance
Term policies offer coverage for a certain amount of time, which is often five to 30 years, depending on the policy. It has no cash value component, and it also tends to be less expensive than other kinds. It’s a good option if you just need coverage while the kids are young or you have debt to repay.
You will typically benefit from a level premium, which means the amount you have to pay each month will not change. After the end of the term, you will no longer have coverage. You will need to either get another policy or do without it. Still, once you are older, it can be more expensive to get insurance, so you should weigh your options carefully.
You might need to get a longer term at the beginning if you want to save money. However, some providers will also allow you to convert term coverage to permanent insurance. If your employer provides coverage, your rates are often determined based on your attained age. That just means the older you get, the more expensive the rates will become.
Understanding Whole Coverage
This is one of the simplest kinds of permanent life and offers coverage for your lifetime. It does have a cash value component. This means some of the money from the premium is placed into a different account. It will grow overtime, and you will not need to pay taxes on these gains. Whole life has a few defining aspects. For example, as long as you pay the guaranteed premiums, the death benefit will be guaranteed. And the premiums will always remain the same. At the same time, the cash value will continue to grow at the guaranteed rate.
This is also a kind of permanent coverage, and it too has a cash value component. The premiums offer some flexibility. That simply means you have the option to reduce or increase the amount you are paying into your policy, as long as you meet the limits. If you don’t pay in enough now, you might need to pay more later on so you can keep your coverage. And if you pay in more now, you could have a higher cash value later, especially with the power of compound interest. But it is a good option if you need something flexible to meet your life circumstances.