If you’ve never carried life insurance, you may be wondering whether you need it. While you’re young and single and have no dependents and no mortgage, it’s not unusual to skip purchasing a life insurance policy. Many workers get small policies through their employers.
But if your circumstances have changed – you have a spouse or a partner, or a child, you have taken on a mortgage or started a small business – you will probably want to purchase a policy to protect your loved ones and their inheritance.
At its most basic, life insurance is a contract between an insurance policyholder (you) and an insurance company. In the contract, you promise to pay a pre-set monthly premium for a certain amount of coverage, and the insurer promises to pay a designated beneficiary a sum of money in the event of your death. In some cases, you can receive funds before your death (in the event of a terminal illness). Once the payment is made, your beneficiaries (the people you name in the policy such as a spouse or children), can use the funds for whatever they wish.
What Are the Basic Types of Life Insurance?
There are three common types of life insurance: term life insurance, whole life insurance, and universal life insurance. There are also many variations of each of these policy types and almost limitless riders available, but here is a general description of how they function and differ from one another.
Term life insurance. A term life policy is one that lasts for a specified period, such as five or 10 years. Life insurance coverage ends when that set period expires, and payouts are possible only if the insured person’s death occurs during that specified period. It is possible, in some cases, to carry the term for longer than the set period of time, but premiums may greatly increase. Because roughly 2% of term insurance policies actually pay out, they are almost always the cheapest way to obtain a straightforward death benefit.
Whole life insurance. As the name implies, whole life insurance offers coverage for the insured person’s lifetime as long as the insured person’s premium payments are in good standing. Unlike term life, these policies can build cash value like an investment. If you reach your later years when there are no minor children to care for or no mortgage to pay off, you can often get back a portion of the money you paid into the policy. In some cases, you can even borrow against this money in the form of policy loans. The downside is that premiums tend to be higher than for term life policies.
Universal life insurance. Universal life insurance guarantees a death benefit, and the premiums remain level, or unchanged. Unlike whole life insurance which has fixed premiums over the life of the policy, Universal Life can offer flexible premiums. As long as the cost of insurance is paid for, either through the policy cash value, or premium payments, the policy will remain in force. However, policyholders must remain cognizant of premium payments, as the cost of insurance increases as you age, and accessing/reducing the cash value may result in policy lapse.
What Type of Life Insurance is Right for You?
There’s no easy answer to this, as everyone’s circumstances differ. It will depend on your age, your health, your obligations, your lifestyle, and your budget. It’s a good idea to consult with a firm like Toomey Investment Management that will independently broker out your options to find the policy that is the best fit for you and your family.
At Toomey Investment Management, Inc. (TIMI), our business model is designed to treat all of our clients equally and fairly. We realized long ago that the financial industry dedicated many resources to capturing money from prospective clients but much less on service and accountability for existing clients. At Wallingford, Connecticut-based TIMI, we listen carefully, keep in touch, and return your calls and communications quickly, so you can count on us. We will work effectively to optimize your life insurance options and solve your problems. Call us at 203-949-1710 or visit our website for more information.