What Type of Life Insurance Do I Need?

Selecting the right type of life insurance for your own specific needs can be a difficult decision, especially because of all of the different types of life insurance available.  To make matters worse, life insurance is usually sold through a salesman that will probably put pressure on you to move into the product that offers them the best commission, not necessarily the product that is the best for your individual needs.  Here are some things to consider when figuring out what type of life insurance you need.

The Different Types of Life Insurance

There are several different types of life insurance.  The two big classes of insurance are temporary and permanent insurance.  Temporary policies are most commonly known as term insurance policies, while permanent insurance has several subclasses: whole life and universal life.

Term insurance is the most basic type of insurance.  Your premium payments simply buy protection for your in the event of death, and provide nothing else.

Whole life insurance provides lifetime death benefit coverage for a level premium.  The premiums are much higher that term insurance, but it is supposed to be comparable to the cost of the rising premiums associated with renewing term insurance later in life.  Whole life policies also have a cash value, which is part of the policy and guaranteed by the company.

Universal life insurance is intended to combine permanent insurance coverage with more flexibility in premium payment, along with greater growth of the cash value.  The premiums paid on the policy increase the cash value, but the cost of insurance and other fees reduces the cash value.  The cash value will change relative to the performance of underlying sub accounts.

What Factors to Consider

There are several factors to consider when deciding on the right type of life insurance for you.  First, you need to think about the reasons why you are getting it.  For example, if you’re considering it to replace income in the event of your death to protect your family, you should also think about the length of time you need this protection for.  For many people, they only need insurance until they get close to retirement age, since by that point, their family will have enough assets to get by should something happen.  That is where term policies are beneficial, because they only last for 20 or 30 years, which for many people, last until 55-65.

However, if you really want life insurance to last forever, a permanent life policy may be the right choice for you.

Understanding the Cost 

Finally, make sure that you fully understand that cost of what you are buying.  Some policies are very easy to understand, with level premiums for the duration of the policy.  However, there are also limited pay policies, in which all the premiums for the policy are paid over a specified period, after which no additional premiums are due to keep the policy in force.  Some policies even allow for the full cost to be paid in advance.