With the increasing cost of living and mortgage costs, as well as rising prices for other essential goods and services, it can be difficult for many people to save money. This is especially true for those with higher salaries who are likely to have larger monthly expenses.
By purchasing a life insurance policy, you can help safeguard your finances in case something unforeseen happens. That’s because life insurance policies pay out a sum of money in the event of the insured person passing away or becoming terminally ill.
While most people may not know it, there are three different types of life insurance: term, universal and whole life plans. These all have their benefits and drawbacks that you should understand before committing to one over another.
What’s the difference between Term, Universal and Whole life?
This is often the biggest confusion that people have when it comes to choosing the right kind of life insurance policy. To make things a little clearer, let’s review the three types of life insurance policies and see how they differ.
Term Insurance: The name says it all – the policy only lasts for the term specified in the policy document. For example, if you buy a term policy that lasts until you are 90 years old, you will only have to pay a yearly premium for the term of the policy. This type of insurance is usually the cheapest, costing around 3% of the value of the insured person’s assets at the time of death. This makes it an ideal option for those who want to protect their finances but don’t want to spend much money in the process.
Universal Life Insurance: Also called permanent life insurance, a universal life policy guarantees a certain amount of death or critical illness insurance coverage regardless of the age of the insured person. Both term and whole-life policies are classified as universal life.
Whole Life Insurance: This type of insurance is the most expensive, with the insurer guaranteeing the insured a minimum sum of money regardless of the period. The policy value is guaranteed for the full term of the policy, regardless of how long the insured person lives.
How do you choose the right type of life insurance?
Before you buy a term life insurance policy, you need to decide on the amount of coverage you want. If you want to buy coverage for a few thousand dollars, you can get coverage for as little as $10,000.
On the other hand, if you want to protect your assets for the long term, you can buy a $5 million policy for just $400 a month. Next, you need to decide on the level of protection you want.
If you are highly concerned about the risk of an event such as a major illness or death of a loved one, you may choose a term life insurance policy with a high death benefit. However, this may end up costing you a significant amount in premiums.
To find the right combination of premiums and coverage, you can use several resources, including life insurance company rate tables and online rate calculators.
Advantages of Having a Term Life Insurance Policy
Flexibility: A term life insurance policy can be taken out for a specified term, usually up to 90 years. After that, you can choose to renew the policy with the same insurer or switch to another one.
Low Cost: The cheapest type of life insurance is term insurance, costing just 3% of the insured person’s assets at the time of death.
Coverage: A term insurance policy will provide you with a certain amount of death or critical illness insurance coverage.
Tax-Free Death Benefit: The death benefit of term insurance is also tax-free.
Why is a Universal Life Insurance Important?
A universal life insurance policy is a form of permanent life insurance that protects a person’s financial future no matter what the age of the insured person may be. In other words, it can help provide some financial security even in old age.
This is an important feature to look for in a life insurance policy because many people simply don’t have enough money saved to cover major expenses like healthcare, retirement, or a worst-case scenario such as the death of a spouse. A universal life policy can help bridge this gap.
It can pay a guaranteed amount of money to a person even if they become disabled or end up being in a situation where they can’t work. This coverage can also be valuable for spouses who are supporting each other financially.
Advantage of a Whole Life Insurance Plan?
A whole life insurance plan is guaranteed to pay out at least the initial $500,000 policy value regardless of the life of the insured person. This can help protect your finances in case you become terminally ill or die prematurely, making the policy worth much more than $500,000.
Whole life insurance plans can also be a great way to meet your financial goals. These policies are often sold as a long-term investment, with the insurance company guaranteeing to give you at least a portion of your investment back at the end of the term.
Disadvantages of a Whole Life Insurance Policy
Costly: The highest cost of a whole life insurance policy is around 10 times more expensive than the lowest cost term insurance policy.
Risky: Though a whole life insurance policy is guaranteed to pay out the initial $500,000, the chance of losing the entire amount is high.
Inadequate Coverage: As the name suggests, a whole-life policy is not enough to provide death or critical illness coverage. You need to have some form of additional insurance such as a term or universal Life policy to address this shortfall.
Limited Investment: A person can only invest a certain amount each year in a whole life plan. The rest of the money must be paid to the insurer.
Summing Up
Life insurance can help protect your finances in the event of an unexpected death or disability. And with three different types of life insurance available, there is sure to be a plan that will suit your financial situation. When choosing the correct type of life insurance, make sure to consider your needs, insurance coverage options, and premium cost.
