Choosing Life Insurance: What You Need To Know

Choosing the right life insurance policy is an important decision, and there are several factors to consider when selecting the best option for you and your family. Firstly, you need to decide if you require life insurance. If you have dependents who rely on your income, then a life insurance policy is usually advisable to provide financial security. Next, you should calculate the amount of coverage you need by assessing your income, dependents' needs, and any existing savings or investments. This will help determine the death benefit required. You can then choose between term life insurance, which provides coverage for a fixed period, or permanent life insurance, which lasts your entire life. Term life insurance is generally more affordable, while permanent life insurance offers additional benefits such as savings or investment components. When selecting a specific policy, compare companies by checking their financial strength ratings, customer satisfaction rankings, and the cost of premiums. It is also essential to understand the policy's exclusions and fine print before making a decision.

Term vs. permanent life insurance

Term life insurance and permanent life insurance are the two main types of life insurance. They differ in terms of length of coverage, benefits offered, and premium structure.

Term Life Insurance

Term life insurance provides temporary coverage for a fixed period, typically between 10 and 30 years, though some companies offer terms of up to 40 years. If the insured person dies during the coverage period, their beneficiaries will receive a payout. However, if the insured person outlives the policy, they won't receive any money unless they have a return-of-premium policy. Term life insurance is generally more affordable than permanent life insurance, especially when purchased at a younger age. It is ideal for those who need short-term coverage or are on a budget.

Permanent Life Insurance

Permanent life insurance, on the other hand, provides coverage for the insured's entire life, as long as they continue to pay the premiums. It is more expensive than term life insurance due to the longer coverage period, cash value component, and policy charges. The cash value of permanent life insurance grows over time and can be accessed by the policyholder while they are still alive, though doing so may decrease the death benefit. Permanent life insurance is suitable for those who need long-term financial protection, want to create an inheritance for their heirs, or prefer stable premiums.

Types of Permanent Life Insurance

There are several types of permanent life insurance policies, including whole life insurance, universal life insurance, and variable life insurance. Whole life insurance offers fixed premiums and a guaranteed death benefit, making it ideal for those with lifelong dependents or estate planning needs. Universal life insurance provides flexible premiums and an adjustable death benefit, along with an interest-earning cash value component. Variable life insurance allows policyholders to control how the savings component is invested, offering the potential for higher cash value growth but also carrying greater risk.

Whole life insurance

The death benefit is a tax-free, guaranteed sum that is paid to beneficiaries upon the death of the insured. This benefit amount is established when the policy is issued and remains the same for the duration of the policy.

The savings component, or cash value, allows policyholders to build up a sum of money that can be borrowed against or withdrawn. Interest accrues on a tax-deferred basis, and the cash value can be used to pay premiums or supplement retirement income. However, withdrawals and loans against the policy will reduce the death benefit.

When considering a whole life insurance policy, it is important to assess your individual needs and financial situation. Whole life insurance is best suited for those with lifelong dependents or estate planning needs, as it provides permanent coverage and guaranteed benefits. It is also a good option for those seeking a policy with a savings component that can be accessed during their lifetime.

Universal life insurance

The death benefit in universal life insurance is also flexible and can be increased or decreased to fit your needs and situation. This feature is particularly useful if your circumstances change over time.

When considering universal life insurance, it's important to weigh the benefits and drawbacks. On the one hand, it offers flexibility in premiums, death benefits, and the ability to borrow against the cash value. On the other hand, the returns are not guaranteed, some withdrawals may be taxed, and there is a risk of policy lapse if the cash value becomes insufficient.

Variable life insurance

When considering a variable life insurance policy, it is important to review all the costs, including fees, and determine whether you can afford this type of policy. You should also assess how much coverage you need and for how long. It is recommended to consult a financial professional or advisor to determine if this type of policy is suitable for your specific circumstances and goals.

Riders and add-ons

Riders are add-ons to your life insurance policy that provide extra coverage or benefits. They can be used to tailor your policy to your specific needs and circumstances, and can be especially useful if you want to access benefits during your lifetime (known as living benefits). Riders typically need to be added when you purchase your policy and can increase the cost of your premium, although this is not always the case.

Accelerated Death Benefit Rider

Also known as a terminal illness rider, this allows you to access your death benefit while you're still alive if you are diagnosed with a qualifying serious or terminal illness. This can help cover medical costs and treatments, and the money is usually tax-free. However, any payouts will be subtracted from the total death benefit that your beneficiaries will receive.

Accidental Death Rider

This rider increases the payout to your beneficiaries if you die from a covered accident, such as drowning. It is sometimes called a "double indemnity" rider as it can double the payout.

Child and Spouse Riders

These riders provide a small death benefit if the insured child or spouse passes away during the rider's term. The payout can cover medical bills, funeral expenses, and burial costs.

Waiver of Premium Rider

This rider waives your policy's premium if you become permanently disabled or lose your income due to injury or illness before a specified age. It can be particularly valuable if you have a high premium.

Family Income Benefit Rider

This rider provides a steady flow of income to family members in the event of the insured's death. It is generally purchased by individuals who are the sole breadwinners of their families.

Long-Term Care Rider

If you need long-term care, this rider allows you to access your policy's death benefit to cover expenses. It is often much cheaper to buy this rider than to take out a separate long-term care insurance policy.

Return of Premium Rider

With this rider, you will be refunded some or all of your term life insurance premiums at the end of the policy term if the death benefit hasn't been paid out.

Term Conversion Rider

This rider allows you to convert a term life insurance policy into a whole life policy during or at the end of the term, without the need for a medical exam. This can be a more affordable way to access permanent coverage later in life.

Frequently asked questions