You know you need life insurance, but which type of policy is best for your family? There are 3 primary types of life insurance, and each comes with its own advantages (and disadvantages). The type of life insurance that’s right for you depends on your needs, your financial goals and your budget.
In this article, we’ll break down the 3 primary types of life insurance: whole life insurance, universal life insurance, and term life insurance. Keep in mind that whichever policy you ultimately choose, there are a number of ways you can customize your policy to better fit your unique situation. And if you’ve already purchased a policy, it’s not too late to change course. In fact, as your family grows and your financial situation evolves, it’s common for your insurance needs to evolve too.
TYPES OF LIFE INSURANCE
WHOLE LIFE INSURANCE
Whole life insurance is a type of permanent life insurance. This means that you have coverage for life, as long as your insurance premiums are paid. Premiums remain level for the duration of the policy—whatever rate you get when you purchase the policy is the same for life; it will never go up.
In addition to life insurance coverage, a whole life policy also comes with a built-in savings account called cash value. When you pay your premium, it increases your cash value. You also earn a guaranteed rate of return from your insurance company, which further grows your cash value. On top of that, if you purchase a policy from a mutual insurance company, you’re eligible to receive non-guaranteed dividends. The top-rated mutual insurance companies we do business with at Paradigm Life have historically paid out dividends for over 100 years.
So, what’s the big deal with cash value? It’s considered a living benefit, which means you can use it during your lifetime. You can borrow it tax-free at any time, or you can withdraw it. People who own whole life insurance often use their cash value for real estate purchases, college tuition for their children, business capital, or even to fund retirement.
Read more: What Is Whole Life Insurance?
UNIVERSAL LIFE INSURANCE
Universal life insurance is another type of permanent life insurance that provides coverage for life, as long as your insurance premiums are paid. Universal life insurance premiums are flexible. You may have the option to pay less if you have a financially difficult year. However, the insurance company can also raise your premium if they choose.
In addition to life insurance coverage, universal life policies also earn cash value. It increases when you pay your premium and you may be able to “over pay” some premiums to grow cash value faster. Insurance companies don’t pay a guaranteed rate of return on universal policies. Instead, growth is based on the performance of the insurance company and its investments, often tied to indexes like the S&P 500 or NASDAQ. Universal life insurance policies typically don’t earn dividends.
Like whole life insurance, your cash value is yours to use during your lifetime. It can be borrowed tax-free or you can withdraw it. But because universal policies don’t earn a guaranteed rate of return (if the insurance company doesn’t perform well in a fiscal year, you may not earn anything at all), it can be hard to plan ahead for financial goals like retirement with universal life insurance.
If you currently own a universal life policy but want the certainty a whole life policy provides, it’s possible to transfer cash value from one policy to another with a 1035 exchange. This allows you to retain certain tax advantages from any earned cash value in your universal policy.
TERM LIFE INSURANCE
Term life insurance only provides coverage for a specified number of years, not for the duration of your life. That means that if you don’t pass away during the term for which you’re insured, your beneficiary won’t receive a death benefit payout. Term life insurance premiums are usually level — they remain the same for the duration of your policy, and they’re the least expensive of any type of life insurance.
The reason term life insurance is so inexpensive is because it doesn’t have a cash value component. There is no living benefit to owning a policy.
If you can’t afford a cash value life insurance policy now but want the living benefits it offers, the best option may be to purchase convertible term life insurance. Convertible term policies allow you to lock in a good health rating now and essentially roll it over to a whole life insurance policy at a later date without an additional medical exam. This means you’ll receive an optimal premium when you’re ready to upgrade your policy.
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