Life Insurance is a benefit commonly provided by employers. There are many different options to choose from depending on your employment philosophy and the level of coverage you want to offer to employees. This article is a high-level overview of three common types of Life Insurance. You should consult an insurance advisor before making any decisions.
What is Life Insurance?
Life Insurance is a type of personal protection where after the passing of an insured (or a set period of time), an insurance company pays the beneficiary a lump sum in return for premiums paid.
What is the purpose of Life Insurance?
Life Insurance is really about the living – those that you leave behind. There are many uses of this kind of insurance, including to:
- Pay for last expenses (funeral, medical bills, etc.).
- Replace income that supports a spouse and/or dependent children.
- Pay off a mortgage or other debts.
- Pay for college education for children in the event of early death.
- Pay estate taxes.
What are the different types of Life Insurance?
There are two main categories – term and permanent (sometimes called “whole”). Here are three common types offered by employers or purchased by individuals.
1. Term Life Insurance
Term Life Insurance has a specified coverage period, but can usually be renewed or converted into a permanent policy at the end of the term. Premiums are generally affordable initially but can increase substantially when renewed.
2. Whole Life Insurance
Whole Life Insurance is a type of permanent insurance that offers life-long coverage combined with a cash-value savings component. This type of policy has higher premiums than term life. Premiums remain constant throughout the policy and a portion is invested by the company, which becomes the cash value of the policy. It pays a fixed amount upon death.
3. Universal Life Insurance
Universal Life Insurance is another type of permanent insurance policy that combines term insurance with the ability to earn interest on the cash value, paying a market rate of return. Cash value grows tax-deferred and can be withdrawn or borrowed from the policy. It is more flexible than Whole Life Insurance as it also allows you to change your premium payments and death benefit, within limits.
What kind of Life Insurance should I buy?
The type of Life Insurance you should purchase really depends on your personal circumstances. The most important consideration is to have a sufficient amount. Often, this will dictate what kind to buy.
Term insurance is like auto insurance. It covers you for a “term” or number of years. Typically, that is five, 10, 15, or 20 years. Term insurance is the most inexpensive type of Life Insurance and is what most young people working to raise a family should consider. It is usually convertible to permanent insurance without a medical exam for a number of years and can often be renewed after the “term,” but at a higher premium. Alternatively, permanent insurance is designed to last your whole life, but it costs significantly more at any given issue age. The ideal time to purchase permanent insurance is while you are still healthy.
Most people are best served by having a combination of permanent insurance and term insurance. The cheaper term life coverage allows younger individuals to have large amounts of coverage while either single, raising children, or working to reach the maximum potential of their career. Permanent coverage will follow an individual into retirement after the term coverage has expired.