What Kind of Life Insurance Should I Get?
You’ve settled down. You and your significant other left the apartment life behind and bought your first house. You both have careers, but maybe one of you wants to stay home now that there’s a baby in the house. And your old compact car wouldn’t accommodate a proper child seat, so there’s a new, safer SUV in the driveway.
That’s a lot of new expenses – a mortgage, a car payment, a college education to save for. Suddenly, the thought of life insurance seems more important. What would happen if you or your spouse dies?
The purpose of life insurance is to replace your salary and earning potential if you die, so your family will be secure. It can seem complicated, but understanding the different types of policies and how they work will help you decide which is best for you and your family.
What exactly is life insurance?
Put simply, you work with a life insurance agent to choose a policy and then make payments (called “premium”) to the company over time. If you die with the policy in effect, the insurance company pays a sum of money (called a “death benefit”) to your beneficiary. The amount of your premium depends primarily on three things:
- What kind of policy you buy
- How much insurance you need
- Your current health
There are many kinds of life insurance, but they generally fall into two broad groups called term policies and permanent policies.
- Term life insurance: This is good for a specified period. Annual renewable term policies insure you for a year at a time and are renewed annually. Level premium term policies cover a person for a period of years – typically 20 or 30, though shorter increments also exist – and are intended to provide coverage during a person’s prime earning years.
- Permanent life insurance: This coverage lasts for a person’s lifetime if the payments are kept current. Below are some common types of permanent insurance. The descriptions apply to most policies, but always check with your insurance provider to see how their policy works.
In whole life insurance policies, your payments are fixed and your account has a cash value that grows over time, like a savings account.
Variable life policies allow you to put your accumulated cash value into an investment account that the insurance company manages, and any earnings add to your account’s value.
Universal life policies are somewhat more flexible than whole life policies; you’re allowed to skip some payments, but must pay at least a specified amount each year.
Variable universal life policies are a combination of the latter two, but they are more complicated and generally not as popular.
Survivorship policies insure both spouses and are paid out when the second person dies.
The main differences between these options are the length of the policies and the cost of the payments.
How do you choose a life insurance policy?
The first step in choosing a life insurance policy is figuring out what you’re trying to protect. Are you trying to replace your income when you pass? Do you have outstanding debts (like a mortgage, car payment, etc.) that need to be taken care of? Are you looking to cover the cost of your funeral? Talk with your loved ones to help you answer this question.
Next, carefully research the insurance provider and the policy benefits. Benefits vary from company to company and the same policy could be cheaper with one provider, but carry less benefits. Choosing the right provider and policy should be like shopping for a car: talk to multiple companies and compare the benefits of each policy as often as you can.
Finally, choose a policy that’s affordable and works well with your budget. Most people pay their premiums for years, making it important to choose a policy that you can afford now and in the future.
For more information about what life insurance options are available, you can read one of the following articles: