Choosing the right Type of Life Insurance

With several types of insurance available, selecting an appropriate policy can be overwhelming. Life insurance is imperative to those that are working and have dependents to replace income after death. Stay at home parents should also consider purchasing life insurance.

The two main types of life insurance are term insurance and cash-value insurance. Term insurance is pure insurance without an investing component. Cash-value insurance is a policy with an investment component.

Term Insurance

Term insurance is a good option for almost everyone and is the least expensive. This type of policy provides coverage for a specific period of time, such as 10 years, 20 years, or 30 years. There are two types of term life insurance available. Annual renewable term life insurance gives you one year of coverage at a time that you renew annually. Premiums rise annually as the policy holder ages. The second type of term life insurance is level premium term. The annual premium is guaranteed from the first to the last year of the policy.

Cash-Value Insurance

There are three primary types of cash-value life insurance. The first type, whole life insurance, covers the policy holder permanently and combines life coverage with an investment fund. The policy will pay a fixed amount upon the policy holder’s death. In addition, part of the premium paid goes toward building cash value from investments made by the insurance company. The cash value is tax-deferred, and you can borrow against the cash accumulation. Universal life is another form of permanent insurance that combines term insurance with a money market investment that pays a rate of return. The third type is variable life and variable universal life. Variable life and variable universal life are both tied to a stock or bond mutual-fund investment. Returns are not guaranteed.

What are the price differences?

The cost of life insurance depends on age, health, size of the death benefit, and the type of policy. The younger and healthier you are, the cheaper the policy. Premiums for cash-value policies are substantially higher than term life. For example, a healthy 40-year-old-man might pay $350 for a $500,000 term policy, but the same amount of coverage would cost about $3000 a year for universal life. In addition to higher premiums, cash-value policies have higher fees in the form of surrender charges and annual investment fees. A surrender charge, which varies by insurer, may be levied if you drop the policy before a certain period of time. Annual investment management fees may run as high as 3% per year.

One of the best and cheapest options is to buy term life insurance while young and healthy and then fill a 401(k) or IRA with low cost investments to financially protect your dependents.  For those that feel they aren’t disciplined to save for the future, cash-value policies may be a good option. The most important factor when choosing a life insurance policy is to understand what you’re buying and how much it costs.