3 Different Life Insurance policies and how they can help us!
Updated: Dec 21, 2020
Life insurance is a great way to protect your family in the event of a death. We have all seen the commercials on TV, but sometimes it doesn’t seem like it would benefit us at the time. Some may feel that life insurance is just for the elderly. That’s not true, life insurance premiums are cheaper when you’re younger and get more expensive as you age. Also, health conditions play a key part in the cost as well. I have seen many circumstances where someone’s family member dies, and the loved ones of the deceased have to start a GoFundMe or other types of fundraisers just to pay for the funeral and related expenses. That influenced my decision to get a policy for myself to protect my family if I were to die unexpectedly.
I know that some get life insurance policies not only to care of their families when they are gone, but also to use them as a way of investing and creating passive income. Here’s a list of 3 different types of insurance policies and how they can help us.
I explain the importance of life insurance and define a few key terms in my post “Here are 8 Reasons Why Life Insurance is a MUST!” I suggest reading over the terms in that post as a refresher before reading this one.
1. Whole Life
A whole life-life insurance policy is a life insurance product that provides coverage for the entire life of the insured (as long as the policy doesn’t lapse). These types of policies have a couple of benefits. 1) cash value, 2) dividends. Essentially, in the event of the insured’s death, the beneficiary of the insurance policy will get paid the death benefit amount that the insured was originally approved for. For example, if John gets life insurance coverage for $100,000 at the age of 47 and pays $60 a month, if he dies at age 70, his beneficiary will get a check for $100,000. The beneficiary can use these funds to cover bills, funeral expenses, a trip to Vegas, whatever they want. The good thing about a whole life insurance policy and life insurance in general is, you don’t have to pay the amount of the death benefit in order for the beneficiary to have access to it in the event of your death. So, even though John did not pay $100,000 worth of monthly payments before he died, his beneficiary was still able to get $100,000.
Now, regarding the benefits I mentioned above, the amounts of these benefits vary from company to company and policy to policy. With a whole life policy, you have the opportunity to build up cash value the longer you make your monthly payments. After a certain amount of time, depending on the terms of your policy, you can access this cash value through a withdrawal, which is essentially money in your pocket. Now you do need to keep in mind that withdrawing cash value does affect the amount of your death benefit in the long run, so be sure to speak to your local life insurance agent to discuss the implications of withdrawing from your cash value. Dividends work in a similar fashion but are not always guaranteed, so again, make sure you read your policy details carefully and discuss any questions with your local agent.
Term life insurance policies work a little differently. They still offer life insurance coverage, but as the name implies, the coverage only lasts for a certain amount of time. Term life insurance products usually offer 10, 20, 15, 25, or 30 years of life insurance coverage, depending on the insurance company. In most cases, there are no opportunities for building cash value or dividends. These types of policies are usually used to serve specific purposes like mortgage protection or other loan protections. For example, if you buy a house, you may opt to get a term life insurance policy for the same dollar amount and amount of time as your mortgage loan so in the event something happens to you while the policy is active, your beneficiary can use the funds of the death benefit to pay off the house. For the majority of homeowners, the mortgage is the largest bill we have, and if our spouse or main income earner dies, the mortgage payments often go unpaid, so a term life insurance product can be useful. These types of policies tend to be the cheapest out of the three types explained in this post for the simple fact that the policy is active for a shorter amount of time.
3. Universal Life
A universal life insurance product is similar to whole life insurance. This type of policy has the opportunity to be a little cheaper than a whole life policy because of the “flexible premium” feature it allows. That simply means you have a range of premiums to choose from; however, choosing a premium that is less than your cost of insurance during any given year can shorten the life of your insurance policy and increase the risk of your policy lapsing. Because of this “flexible premium” payment option, many people choose to pay the maximum premium possible at the beginning, which builds up the account’s cash value, so that they can use that cash value later on in life to help supplement their premium payments. Remember, the cost of insurance increases as you age, so even though you may be paying a $30 premium, because you got the policy when you were young, that does not mean your cost of insurance is $30 for your whole life. Your premium may not change for the life of the policy, but your cost of insurance does, which is why building cash value is important to maintaining permanent life insurance policies.
Thank you for reading my post “3 Different Life Insurance policies and how they can help us!” I hope this post has provided a little more clarity on the three main types of life insurance. If you have any questions about your life insurance options, be sure to contact your local life insurance agent to discuss which type of policy works best for you. Feel free to subscribe and share this post. Also feel free to follow me on social media!