The basic reason for having life insurance is the promise that your loved ones will be protected financially in the event of your premature death.
There are many types of life insurance, and all of them can protect your family or loved ones, but they differ in a variety of aspects that affect the desired outcome.
Let’s explore first the main factor by which life insurance differs – the duration of its coverage – and afterwards we will look at the main features of life insurance.
What are the main types of life insurance?
As we have already said, the two main types of life insurance are defined by their duration:
- Term life insurance (level term, return of premium)
- Permanent life insurance (whole life & universal)
Term life insurance
The first type of life insurance is called term insurance because you get coverage for a limited period. It is usually sold in defined lengths of time, e.g., 1, 5, 10, 15, 20, or 25 years.
If the worst happens during the coverage of the insurance, the death benefit included in the policy is paid to the beneficiaries. If all goes well and you are alive and well after it expires, you have two options, either insure again or not.
Permanent life insurance – whole & universal
The second type of life insurance is life-long. It covers you your entire life, which means that it pays a death benefit whenever you die, even if you are 101 years old.
Permanent life insurance is usually more complex and more expensive than term, but it includes a cash value component, which can benefit you in many ways, such as helping to build your retirement plan, earning interest, your ability to withdraw or borrow against it in case of an emergency, tax benefits, and other financial benefits along the way, while providing protection for life.
Depending on your needs and goals, you can set other criteria to formulate the best insurance policy to protect you and your loved ones.
What are the main features of life insurance?
Life insurance is a unique tool to provide protection and peace of mind, but to make the most of its protection mechanisms, we need to get acquainted with its main characteristics.
- The beneficiaries
Are the people you name to receive the death benefit in your life insurance policy. It could be one person, e.g., your spouse, or more than one person, e.g., a proportion of the death benefit to each of your children. It’s important to note that life insurance and the beneficiaries named in it cannot be changed by а will. Therefore, insurance policies should not be included in the creation of a will.
- The death benefit
Is the payout, the amount of money paid to the beneficiaries named in your policy should you die while your life insurance policy is in force. The benefit could be paid as a lump sum or as an annuity.
- The cash value
Is a component of life insurance that functions as a secure investment with a low interest rate. The cash value can be paid to you, but only if you outlive the duration of the policy.
- The premium
Is the amount you need to pay your insurance company in exchange for the insurance coverage you will receive from it. The premium amount should be chosen wisely so you don’t miss a payment and don’t jeopardize either your insurance policy or the family budget.
- Type of coverage
Depends on the length of coverage you choose and other components, such as your age, state of health, and financial commitments.
Different types of term life insurance and how they protect you
The two basic types of term life insurance are level term plans and return of premium.
Level term life insurance
Level term insurance is considered to be one of the purest and simplest forms of life insurance.
The insured amount is fixed during the policy period, and a death benefit is paid to the beneficiaries in the event of the death of the insured person within the term of the policy.
- Level term life insurance protects your loved ones in the event of your death.
- Level term insurance is often the cheapest life insurance.
- If you outlive the duration of your term policy, neither you nor your beneficiaries will receive any payout.
Term plan with return of premium (TROP)
Return of premium term insurance gives you a saving component, which is usually part of whole life insurance and not included in term insurance.
- Return of premium is a popular type of insurance that repays you all the premiums you have paid to the maturity date of your policy.
- Your premiums are repaid only if you haven’t made any claims during the coverage of the policy.
Convertible term plans
Convertible life insurance comes with an option to convert your plan into a different type of insurance plan at a future date.
- The convertible plan gives you the peace of mind that, depending on your needs, you can change your policy without any hassle.
Different types of permanent life insurance and how they protect you
Permanent life insurance comes in two basic forms: whole life and universal life.
Whole life insurance
Whole life insurance protects you your entire life. It is accepted as a life-long asset that helps you to build your financial plans and meet your financial or retirement goals.
- The biggest benefit of having whole life insurance is that it gives you lifelong protection.
- The second biggest benefit is that the whole life policy provides a so-called cash value as an investment component that can reduce your taxes, bring you interest earnings and annual dividends, and so on.
- Whole life insurance is more complicated and more expensive than term insurance. However, it gives you not only peace of mind for you and your loved ones but also financial benefits over the years.
Universal life insurance
Universal life insurance protects you your entire life, just like whole life insurance, but the cash value gives you variable interest, leaving you with better or worse premium payments.
- The biggest benefit of having universal life insurance is that you can control the premiums and the coverage.
- The second benefit is that you can change the frequency and size of your payments.
- The third benefit is that you can also change the death benefit.
- The greater flexibility and control over your policy also places more responsibility on you, and you need to be disciplined to maintain it.
How life insurance protects you
Purchasing a life insurance policy is probably one of the smartest financial decisions that you might make, especially when it comes to purchasing a permanent one, with its two main components – the death benefit and the cash value.
The death benefit protects your loved ones financially when you are no longer with them.
The cash value, on the other hand, protects you and your loved ones while your life insurance policy is in effect.
Life insurance helps in many diverse ways:
- It maintains your dependents’ financial well-being by replacing the loss of your income after you pass away.
- The death benefit of your policy can help your children maintain the standard of living they are used to.
- The death benefit of your policy can be used for paying your children’s college education.
- The cash value can contribute a lot to your retirement planning, specifically in terms of income.
- The additional optional benefits included in most life insurance policies can support not only your loved ones’ needs after you pass away but your own needs, in the unfortunate case of terminal or chronic illness.
In conclusion, we can say that having life insurance is an important component of your overall financial well-being.
Life insurance and other tools of protection give both you and your loved ones the peace of mind that, in the event of something happening to you, they will be protected and able to maintain the quality of life they are used to.