Life insurance may not be everyone's favorite topic to think about, but it is an important financial tool to guard against risk. There are many different types, and you may choose differently depending on your age and circumstance.
Selecting the right life insurance for personal goals, needs and concerns is important for avoiding future complications. The right type of plan for one individual might not be the appropriate option for someone else, even if their age is the same. The key to finding the right policy is learning about the differences between different options.
A term life insurance plan is a simple coverage option. It provides a set amount of money that is given to the named beneficiary after a death occurs within the set time period.
The life insurance policy does not carry forward for a lifetime. It has a set term, or period of time, that coverage is available. The term can vary, such as a five year term or a 20 year term. Depending on the situation and the reason for seeking out coverage, the appropriate amount of time may vary. For example, a family with young children may determine that a 20 year term policy is appropriate in case an accident occurs that results in a death before the children are adults.
Term life policies do not have any investment components. They are usually the least expensive option, so it is appropriate for young individuals and families who may have a strict budget.
A whole life policy is another common option that offers an investment component as well as a guaranteed benefit. The policy carries forward for the entire life of the policy holder and the beneficiary identified in the policy will receive the stated amount.
Along with the guarantee of payment, whole life policies put a portion of the premium into an investment. Policy holders may receive dividends, but companies vary in how the investment portion of the policy works.
A universal life insurance policy is similar to both whole life and term life policies. It carries forward for a lifetime and offers a greater level of flexibility than a whole life policy. On the other hand, it does not have a guaranteed payment amount.
In a universal life policy, the company invests a portion of funds that exceed the minimum premium. Due to the investment element, policy holders are not given a guaranteed amount beyond the stated minimum. Due to the method of investment, the company goes not make a guarantee in the same way that a whole life policy offers.
The primary benefit of a universal policy is the flexibility. Policy holders can make adjustments as long as the minimum premium is paid.
A variable life policy refers to a policy that is similar to a universal life option, but with a greater number of investment options. The company provides several investment opportunities, including stock investments, which allow policy holders to increase the amount that loved ones will receive when they die.
Variable life insurance is a permanent policy. It carries forward for a lifetime and will pay out to the beneficiary stated on the policy.
An annuity is a type of insurance plan that offers a monthly payment. It is usually used as a part of a retirement plan that begins at a stated period of time. Annuities can have a fixed amount that is paid each month or it can have a variable rate, depending on the selected plan.
Life insurance may seem complicated, but the key element to consider is the final goal. A term life policy is ideal for individuals who do not want an investment element, but may worry about the financial future of loved ones. When an investment opportunity is an important part of the policy, whole life, universal life and variable life policies may be appropriate.