The Most Straightforward Explanation Of Life Insurance Types You'll Read Today
Health insurance, car insurance, home insurance... All these policies help cover your biggest expenses when something happens to you. But the irony of life insurance is that it doesn't actually protect you while you're alive. Instead, it protects your family after you die.
If you have life insurance and something happens to you, your family gets money to help them get by after you're gone. But first you have to choose a plan. And just like health insurance, you have a huge range of policies to choose from.
We won't bore you with a description of every possible life insurance option. There are just too many, and the differences get pretty tricky to understand. Instead, we'll just tell you what you absolutely need to know about life insurance policies.
There Are Two Major Life Insurance Types
When you're looking for life insurance, you have to decide between two major types: term and whole. Both have some variation of the three terms below.
- Premium: The amount you pay for life insurance coverage. When and how often you pay depends on your plan.
- Death benefit: The amount of money your family gets when you pass away.
- Cash value: The amount of money you earn back while you're paying for a whole life insurance policy.
Every life insurance plan offers a death benefit, no matter what type you buy. (After all, that's the point of having life insurance.) The difference between term and whole life insurance policies is how much and how long you pay for coverage, and whether or not you build cash value.
1) Term Life Insurance
Also called temporary life insurance, term life covers you for a specific time periodâanywhere from one to 30 years, or to a specified age. It works just like any other type of insurance: You pay a monthly premium for a set time period. In return, your family gets a certain amount of money (the death benefit) if you die during that time.
And that’s all there is to it. As long as you pay your premium, you’ll have death benefit coverage. If you outlive that term, then congrats! But your insurance company won't give you any money. You'll have to buy a new life insurance policy.
So then, if you don’t get any benefit from your term life plan (because you outlive it), what's the point of buying term insurance? The point is that your family is protected in case you die during that time period.
Plus, term life is cheaper than other types of life insurance. And if you decide you don't want it anymore, just stop paying your premium. No questions asked. (Except maybe, Are you sure you want to risk being uninsured?)
2) Whole Life Insurance
Whereas term insurance is temporary, whole life insurance is permanent. And it means exactly what you think: You pay for your life insurance policy the whole time you're alive.
We know that sounds like a huge commitment, but think about it this way: As long as you pay your premium, your family is guaranteed to get money when you die. There's no term limit because your policy expires when you do.
Whole life is more expensive than term life, but your premium doesn’t increase over time. You'll pay the same premium at age 30 as you will at 85. Plus, whole insurance lets you build up cash value. You can use that money to get a loan, save up for retirement, or pay for your life insurance premium. And you won't pay taxes on it.
Basically, in return for paying for life insurance for the rest of your life, you get three huge perks: a guaranteed death benefit, untaxed cash value, and a premium that doesn't increase over your lifetime.
Get Help Deciding Which Policy You Need
Whichever type of life insurance you go for, don't skimp on your policy! You want your plan to last as long as you're supporting your family. We know that's a lot to think about, so if you want guidance sorting through your options, start with Insurance Clarity. We'll put you in touch with an expert agent who will help you decide which policy is best for your family.