Understanding the different types of life insurance policies can seem challenging and overwhelming without the assistance of an experienced agent. Mckenzie Life and Health is here to help you find the right coverage for your needs, and we are happy to review all of your options with you. There are two main types of life insurance plans available: term life and permanent life. Let’s take a look at how these different policies work and how they differ from one another.
Term Life Insurance
What Is It?
Term life insurance is a policy that is in force for a specific period of time, often between 10 and 30 years. This type of life insurance can provide you and your family with a short-term financial safety net in the event of your unexpected passing. Term life insurance is one of the most straightforward types of policies available to consumers, and it is a popular type of life insurance coverage.
How Do Term Life Insurance Plans Work?
Term life policies operate in a very simple manner. As a policy owner, you choose the amount of coverage that you want and the length of time you want your policy to be in force. Your life insurance policy will remain in force for this predetermined period of time as long as the premium payments are made. If you pass away during the time that the policy is active, your beneficiaries receive death benefits. Outside of the death benefits provided by the policy, term life plans have no other value.
Once the policy period has expired, you’ll have the option of renewing the policy to continue coverage. Premiums on renewed policies are often higher than they were initially. You’ll also have the option to convert the term life policy to a permanent life insurance policy.
In general, term life insurance is purchased to replace your income if you die so that your loved ones can pay debts and living costs. For example, if you and your spouse own a home and you were to pass away tomorrow, your spouse would have to pay the mortgage on his or her own. If you had the proper term life insurance policy, your spouse would receive enough money from the policy’s death benefit to pay off – or at least keep up with – the mortgage. Because of its low cost, relative to other types of life insurance, term life continues to be the most popular life insurance choice.
Permanent Life Insurance
What Is It?
Permanent life insurance provides long-term coverage for individuals. These policies remain in effect for life as long as premium payments are made. Whole life, universal life, and variable life insurance are all types of permanent life insurance. These policies offer a death benefit just like term policies, but they can also be used as a savings or investment tool.
How Do Permanent Life Insurance Plans Work?
Whole life insurance offers fixed premiums for the duration of the policy, death benefits are guaranteed, and the policy builds cash value at a guaranteed rate as premiums are paid. The cash value on the policy grows slowly over time and the gains are tax-deferred, meaning you won’t have to pay taxes on policy gains as they are accumulating. With some policies, it is also possible to receive dividend payments.
Universal life (UL) policies are slightly more customizable, offering flexible premiums, a level of increasing death benefits, and a tax-deferred investment opportunity for the insured. They are usually associated with some type of interest-bearing account, allowing you to borrow against the policy as long as premiums are paid. Death benefits are reduced if money is borrowed against the policy, but individuals have the option of adjusting death benefit amounts and premium amounts.
Variable life insurance policies are tied to market performance and they offer a wider range of investment choices. This type of policy can also be used as a savings or investment tool, and death benefits and premiums may fluctuate depending on how the market is doing.