There are many kinds of insurance that we feel compelled to participate in throughout our lives. That includes car insurance, home insurance, and health insurance. However, one of the most important and selfless policies you can get is a life insurance policy.
Around sixty percent of all Americans have some form of life insurance.
Unfortunately, with so many different types of life insurance plans out there, it’s easy to get overwhelmed. When this happens, you might simply feel compelled to go with the first plan you come across, just to get it over with. Obviously, this isn’t a great strategy.
And that’s why we’re here to help. In this article, we’ll walk you through the different kinds of life insurance plans so that you’ll be able to better determine which type of plan is best for you. So keep on reading and we’ll take you through everything you’ll want to know.
Term Life Insurance
This kind of life insurance lasts for a set number of years. After the term is over, the insurance expires. If you die before the policy expires, then money will be paid to your beneficiary.
The amount of money that goes to your beneficiary is referred to as the death benefit.
Most people consider term life insurance to be the most accessible and simplest life insurance policy.
When you make your payments (referred to as premiums), you are essentially paying for the death benefit that’s going to go to your beneficiaries after you die. The death benefit can be paid out as an annuity, a monthly payment, or even a lump sum. Many people choose to take the death benefit as one lump sum.
Term life insurance policies are cheaper than other kinds of life insurance plans and they usually come with lower premium costs.
Whole Life Insurance
Unlike term life insurance, whole life insurance is a kind of permanent life insurance that never expires. It comes with a cash value and a death benefit. The cash value is like an investment and works as a tax-deferred savings account that’s included in the policy.
The cash value will accrue interest at a set fixed rate. Every month, some of your premium is going to go into the cash value of the plan. This offers a guaranteed rate of return.
The exact amount of money that will go into the savings account will depend on the terms of your specific policy. The cash value for the policy will grow over time and it can be withdrawn when it is worth a certain value. It can also be used for a loan.
For the same death benefit amount, a whole life insurance policy can cost significantly more than a term life insurance policy.
Whole life insurance will offer coverage for life as long as you continue to pay your premiums. With that said, the cash value aspect of the policy makes it more complex than term life insurance. This is because of interest, taxes, surrender fees, and other stipulations.
If you need the cash value to cover things like estate plans or endowments, then you may want to opt for whole life insurance. It’s also worthwhile if you have children with disabilities or other long-term dependents.
Paid Up Additional Insurance
A paid up additions rider can be added to your whole life insurance policy. You buy this rider with the dividends that you earn from the policy.
These riders let you increase your living benefit and death benefit by increasing the cash value of the policy.
Universal Life Insurance
Universal life insurance also comes with a cash value. Your premiums are also going to go to both the death benefit and the cash value.
However, what makes universal life insurance so interesting is that you can change the death benefit and premium amounts without switching to a new policy.
In order to keep your policy active, you will need to maintain a minimum premium. However, you can use the cash value to cover the cost of the premium.
This means that if you have enough money in your cash value, then you can use the cash value to avoid having to pay any premium payments. The interest that you accrued can pay your premiums until your cash value runs out.
It’s important to note that the cash value that comes with this kind of insurance plan bears an interest rate that is related to the current interest rates of the market.
Your payments will have to increase in order to offset the lowered cash value that results from an interest rate that is decreased to the minimum rate of the policy.
A lot of people are attracted to the flexibility that comes with universal life insurance. However, many people often find it confusing and may end up spending more money than it’s worth.
The Importance of Knowing the Common Types of Life Insurance
Hopefully, after reading the above article, you now have a better understanding of what the common types of life insurance are. As we can see, these policies vary greatly, so it’s important that you choose wisely.
You need to make sure that you review your current situation in life so that you can figure out which policy is going to be best for you and your beneficiaries.
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