What Type of Life Insurance Do I Need?
You may have heard of life insurance. You may have even read that it’s a great way to protect your loved ones if you die. As it turns out, life insurance can be pretty confusing: less than half of all Americans have any form of life insurance and 26% of Americans don’t even know what it is.
What is Life Insurance?
Life insurance is a form of protection. It’s a tax-free cash payment that goes to your loved ones in the event of your death. It allows them to continue pursuing their dreams without an additional financial burden and provides you with peace of mind.
While it isn’t required like some other forms of insurance, it might be considered a necessity if you have someone who relies on you and your income.
The vast majority of life insurance is purchased individually directly from a company. Fortunately, it’s never been easier or less expensive to get it.
The Two Types of Life Insurance
Not all life insurance is the same. Policies vary based on length, cost, and what they cover, but at a high level, there are two types of life insurance: term and permanent.
1. Term Life Insurance
Term life insurance is the simplest, easiest to understand, and least expensive type of life insurance. A term life policy costs just a couple of dollars per month and covers you and your loved ones for a period of time, the term, should anything happen to you during that period. When the term is up, you can choose to renew, apply for another policy, or let it expire.
If something happens to you during the term, your beneficiaries, which are the people you designate to receive the lump sum payout, will receive a tax-free payment. The payout can be used to cover many things, like: living expenses, debt, a mortgage, or anything else the beneficiaries choose.
A term policy consists of a coverage amount. Put simply, the coverage amount is the size of the payout your loved ones would get should something happen to you. Term policies also consist of a term, which is the number of years you want the policy to last.
If you can’t afford to buy as much coverage as you’d like right now, you can always buy more later. Even a small policy can make a huge difference in your loved one’s lives and be a great benefit to them.
2. Permanent Life Insurance
There are two types of permanent life insurance: universal life insurance and whole life insurance. Unlike term life insurance, it’s good for the entire life of the insured person, and has both a cash accumulation value and a death benefit. However, this type of policy can cost up to 20x more than a term life insurance policy, and can take weeks, or even months, to purchase.
Universal Life Insurance
With this life insurance policy, you can increase or decrease your premium payments according to your financial needs. However, even the lowest payment is more expensive than a term life insurance policy payment. In fact, despite this “flexibility,” 88 percent* of permanent policies are canceled over the length of the term, leaving no safety net for the beneficiaries.
Universal life insurance policies can be useful to those who have maxed out their 401(K)s and all other retirement plans. It can be used to transfer wealth without having to pay estate taxes. It can also be used as a source of income later in life even though it is expensive.
Whole Life Insurance
Whole life insurance has a lot in common with universal life insurance, but the premiums are fixed throughout your lifetime. Those who buy these types of policies usually use it as a tax-deferred way to grow their money. Unfortunately, they are often left disappointed as their money doesn’t grow nearly as quickly as it might have through other investments.
Some whole life insurance policies include a guaranteed minimum rate of return, but keep in mind that this rate is pretty low. For many freelancers, whole life insurance doesn’t make sense unless you have a multi-million-dollar estate to protect.
Choose Your Type Based On Your Needs and Financial Situation
Remember, life insurance is a form of protection. It protects the life you are building and the people you love in the event something happens to you. Despite rumors, it isn’t necessarily expensive and it can be pretty easy to buy. Be sure to consider your needs and financial situation when choosing what type to buy.
Term life insurance policies are great for:
People who want the least expensive option.
People who want to protect their family from a loss of income, help them pay off debts, fund college tuition, and retire early.
Young people who need to replace income in the event of their untimely death, but don’t have a ton of extra money to spend.
People who only need it for a certain amount of time, such as during the time when their kids are living at home or until their house is paid off.
Permanent life insurance policies are great for:
People who want coverage, regardless of what age they live to.
Retirees who want to leave money to heirs, but also want to spend the money they’ve earned over the years.
Managing estate taxes so that heirs don’t have to cut into their inheritance to pay them.
Funding for a special needs trust to provide lifelong care for a dependent after the insured person dies.
Equalizing inheritance when only one child can be the recipient of property or the family business.
If you have someone who depends on you, life insurance is a necessity. Freelancers and side job workers aren’t offered policies through employers, so it is especially important to think about. Make sure to take your time to research your options and remember that there’s no better time than right now to buy it.
