Understand what the different kinds of life insurance are and make a more educated choice.
Jackie, 31, an account executive at an advertising agency, is worried about the future. It’s not because she doesn’t have enough money—she makes a comfortable wage, and has started investing in mutual funds.
In fact, Jackie’s not even worried about herself. Because she's a single parent, she’s more concerned about her 2-year-old son. What would become of him if something happened to her?
For single parents like Jackie, or even a household’s primary breadwinners, getting life insurance is one way to make sure that your loved ones are provided for even after you have passed. But comparing insurance policies can get pretty daunting, which is why it’s important to understand what your options are, and how they differ.
Let’s start with the basics: there are two kinds of life insurance: term life insurance and permanent life insurance. Here’s what you should know about both to help you choose.
Term insurance is temporary, which means that they’re only valid for a limited amount of time—say 5, 10, 20, 30 years. At the end of the term, the policy will no longer have any value, but most term policies let you convert to a permanent policy smoothly.
According to the Insurance Information Institute, this is a simpler, more inexpensive policy that is perfect for people with kids. For example, if you predict that your kids will no longer be financially dependent on you in 16 years, get a 20-year term life insurance policy.
A temporary policy is also ideal for those who anticipate that after a certain point, they’ll be more financially independent, and thus able to leave a good-sized estate to your loved ones without insurance.
Term insurance comes handy if something were to happen to you. It will pay off the mortgage in your absence, or make provisions for your child's tuition.
That said, this is not an investment. At the end of the term, if you are still alive, you do not get any returns for the premium you pay. This is those kinds of life insurance that benefits others after your death or in some cases, during critical illnesses.
As the name implies, the permanent life insurance provides coverage for as long as you live, which is why permanent insurance is more expensive than term insurance. There are four kinds of permanent life insurance: whole life, universal life, variable life, and variable universal. But we’ll get into that in a later article.
Who could a permanent life insurance policy work for? If you feel like your loved ones need another safety net when you die, you’ll be sure that they’ll get benefits as long as you pay your premiums on time. But investing in a permanent life insurance policy can also be a smart investment.
Permanent life insurance policies can also be considered financial investments. This is because most permanent life insurance policies have a savings component; the insurance company invests part of your premiums, making this an alternative way for you to grow your money.
Should you cancel your policy, you get access to your policy’s savings component, or cash surrender value. You could also borrow part of your cash value without canceling, but if you don’t pay this back, it reduces your death benefit.
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When choosing your life insurance policy, think about your goals and why you’re getting a policy in the first place. Who will be your beneficiaries? How long do you want your policy to last? How much can you afford to give?
If you’re still stuck, remember that you can always consult a financial adviser. Even though you’re the only one who can answer these questions, you can always get professional help when making an important financial decision.