If you’re considering purchasing life insurance, it’s crucial to understand the different types of life insurance policies available. While term life insurance is pretty simple to understand, permanent life insurance comes in many forms, with investment options that increase their complexity.
Here’s what you need to know about the different types of life insurance before selecting a policy — especially now.
Term life insurance
With term life insurance, consumers select a policy for a specified amount of time, often 10, 15, 20 or 30 years. The insurance premium (the amount you pay each month) stays the same each year of that term. As long as the premium is paid, the insurance company will pay out the coverage amount (a lump sum of money called a “death benefit”), should the policyowner pass away before the term expires.
The pros of term life insurance
Term life insurance is a good option for those who need life insurance only for a specific period of time. The insurance might be purchased to cover child care and education costs for children should the policyowner pass away before they finish their schooling. Or it could cover a spouse or other beneficiary’s living or retirement expenses if the policyowner passes away during the income-earning years.
People who buy term life insurance often build savings through other means, such as retirement accounts and investments. That way, when the term policy runs out, they don’t necessarily have to buy another policy, if their future financial needs are covered by other investments.
Term life insurance is generally less expensive than permanent insurance. It may be the best choice on a limited budget or during times of economic uncertainty.
The cons of term life insurance
Policyholders may need to take a physical exam to apply. Health status, age, sex and other risk factors affect the premium cost, and insurance companies can decline to cover you.
If a policyholder decides to renew his or her term policy after it expires, the price will increase. Term insurance is not an investment vehicle, so when the policy ends, the policyowner gets no financial benefit.
Permanent life insurance
Permanent life insurance is an umbrella term that includes whole life insurance, universal life insurance, and variable universal life insurance. Permanent life insurance has a death benefit and sometimes a savings vehicle, too.
The differences between these options involve how the investment portion of the policy works. Both permanent and term life insurance policies sometimes offer special add-ons called riders, such as additional payments for accidental death or premium payments made on your behalf if you become disabled.
The pros of permanent life insurance
Permanent life insurance is good for people who need life insurance coverage for longer than a typical term duration or want it to also serve as a savings or investment vehicle. Variable policies and those that invest in index funds entail greater risk and can earn more or less than fixed options, depending on the market.
The cons of permanent life insurance
Like term life insurance, policyholders may need to take a physical exam to apply for permanent life insurance. Health status, age, sex and other risk factors affect the premium cost, and insurance companies can decline to cover you.
Permanent life insurance also typically requires more premium for the same death benefit. Additionally, the cash value portion must be used during the policyholder’s lifetime. There are different ways to do this, including taking the money as a low-interest loan, possibly to pay for college or a house or supplementing income for retirement, although any money not repaid is subtracted from the death benefit.
For some policies, the cash value can also be used to pay the insurance premiums later in life. Some policies can be cashed out (which negates the death benefit) or structured so the accumulated cash value increases the death benefit. If you are researching life insurance to ensure your family has funds to replace your income if you pass away, term insurance might be a better option.
When should you get life insurance?
As a general rule, buying life insurance early in life helps lower the monthly price. As you age, the premiums tend to rise. Locking in premium rates while you’re young may help save money for the long term — as could buying coverage for a longer period of time, if that suits your needs. Don’t buy more than you need, but keep in mind that expanding your coverage later on could be more expensive than adding those features earlier on.
Still unsure of which life insurance policy is right for you? Use this life insurance comparison tool from Nationwide to find out. Or contact our licensed financial coaches at 1-866-207-9160 for more guidance.
As your personal situations change (i.e., marriage, birth of a child or job promotion), so will your life insurance needs. Care should be taken to ensure these strategies and products are suitable for your long-term life insurance needs. You should weigh your objectives, time horizon and risk tolerance as well as any associated costs before investing. Also, be aware that market volatility can lead to the possibility of the need for additional premium in your policy. Variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit your individual needs.