Understanding the Different Types of Life Insurance

understanding life insurance

If you are considering purchasing life insurance, it is crucial to understand the different types of policies available.  While term life insurance is pretty simple to understand, permanent life insurance come 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.

Term life insurance

Term life insurance is easy to understand. Consumers select a policy for a specified amount of time, often 10, 15 or 30 years. The insurance premium stays the same each year of that term. As long as the premium is paid, the insurance company pays a death benefit should the policy owner die before the term expires.

Who should buy term life insurance?

Term insurance is a good option for those who only need life insurance for a specific period of time. The insurance might be purchased to cover child care and education costs for children should the policy owner die before they finish their schooling. Or it could cover a spouse or other beneficiary’s living or retirement expenses if the policy owner dies during the income-earning years.

People who buy term insurance often build savings through other means, like 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.

The downside to term life insurance

Policyholders may need to take a physical exam to apply. Health status, age, gender 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 policy owner gets no financial benefit.

Permanent life insurance

Permanent life insurance is an umbrella term that includes whole life, universal life, index-universal life 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 sometime offer riders, such as additional payments for accidental death or premium payments made on your behalf if you become disabled.

Who should buy permanent life insurance?

Permanent life insurance is good for people who want to maintain life insurance throughout their life with a fixed premium. Others are attracted by the forced savings element of these policies. 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 downside to permanent life insurance:

Permanent life insurance typically requires more premium than term life insurance for the same death benefit. The cash value portion must also be used during the policyholder’s lifetime. There are different ways to do this, including tapping the money as a low-interest loan, possibly for college or a house, although any money not repaid is subtracted from the death benefit.

For some policies, the policy’s 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 restructured so the accumulated cash value increases the death benefit. An insurance agent can explain the benefits and drawbacks of each option in more detail.

Talk to an insurance agent or call Nationwide at 844-538-9998, to talk about your life insurance needs and to find the policy best suited for you.

 

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.