There are several financial tools designed to help provide financial support for loved ones after you pass away, but choosing the right one can feel overwhelming. Life insurance is one of the most common options, and understanding the basics can help you decide what may be appropriate for your situation.
Many people don’t enjoy thinking about end-of-life planning, but it can be an important part of financial planning—especially if others depend on your income. Before choosing a life insurance policy, it can be helpful to consider a few questions:
- How much coverage might be needed based on your obligations and dependents?
- How long do you expect to need coverage?
- What premium amount fits comfortably within your budget?
- Do you want the option to access funds during your lifetime?
Your answers can help guide you toward a type of life insurance that aligns with your needs and financial circumstances.
Term Life Insurance
Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If the insured person passes away during the term, the policy pays a death benefit to the named beneficiaries. If the term ends while the insured is still alive, coverage typically ends unless the policy is renewed or converted, subject to insurer rules.
Term life insurance is designed primarily to provide financial protection during certain life stages, such as working years or while carrying major financial obligations. It generally does not include a savings or investment component and is often less expensive than permanent insurance options.
Pros
- Straightforward structure
- Typically lower premiums compared to permanent policies
Cons
- Coverage usually ends at the conclusion of the term
- Renewing or reapplying later in life may result in higher premiums
Best For
- Younger adults with loans or other financial obligations
- Families seeking temporary coverage during key earning years
- Those looking for lower-cost coverage for a defined period
Permanent Life Insurance
Unlike term life insurance, permanent life insurance is intended to last for the insured’s lifetime, provided premiums are paid as required. Permanent policies generally include a cash value component in addition to the death benefit. There are several types of permanent life insurance, each with different features.
Whole Life Insurance
Whole life insurance is a type of permanent insurance that offers lifetime coverage and a fixed premium. Part of each premium typically goes toward building cash value, which grows at a rate set by the insurer, while the rest funds the death benefit.
The cash value may grow over time and can sometimes be accessed through withdrawals or policy loans, subject to policy terms. Premiums are generally higher than those for term life insurance, reflecting the lifetime coverage and cash value component.
Pros
- Lifetime coverage if premiums are paid
- Cash value component that grows over time
- Premiums and death benefit are typically fixed
- Some policies may be eligible for dividends, depending on the insurer
Cons
- Higher premiums than term life insurance
- More complex structure
Best For
- Individuals seeking lifetime coverage with a savings component
- Those who have already maximized other tax-advantaged savings options
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) is another form of permanent insurance that includes a cash value component. Cash value growth is tied to the performance of a selected market index, subject to caps, floors, and participation rates set by the insurer.
If the index performs positively, the cash value may earn interest up to certain limits. If the index performs poorly, the policy may earn little or no interest, but typically does not lose value due to market declines, depending on policy terms.
IUL policies may offer flexibility to adjust premiums and death benefits, subject to underwriting and insurer approval. If cash value is sufficient, it may be used to cover future premiums, though this requires careful monitoring.
Pros
- Cash value grows on a tax-deferred basis
- Potential to earn interest linked to market performance
- Some downside protection compared to direct market investments
Cons
- Returns depend on insurer-set caps and participation rates
- Periods with little or no interest crediting are possible
Best For
- Individuals comfortable with market-linked performance
- Those seeking an additional long-term planning option after other savings avenues
Variable Life Insurance
Variable life insurance is a permanent policy that includes an investment component. The cash value is invested in sub-accounts, often similar to mutual funds, and performance depends on market conditions.
Because cash value is invested, it can increase or decrease based on market performance. While this offers potential for higher growth, it also carries greater risk, including the possibility of loss.
Earnings within the policy generally grow tax-deferred, and cash value may be accessed through withdrawals or loans, subject to policy rules and potential tax consequences.
Pros
- Lifetime coverage
- Greater control over investment choices
- Potential for higher cash value growth
Cons
- Higher risk due to market exposure
- Requires active monitoring and management
- Typically higher premiums and complexity
Best For
- Individuals comfortable managing investments and market risk
- Those who can afford higher premiums and have long-term planning goals
Choosing a life insurance policy involves balancing cost, coverage needs, time horizon, and risk tolerance. Some people prioritize affordable coverage for a specific period, while others prefer lifetime coverage with additional features. Reviewing your financial situation and long-term goals can help you decide which option may be the best fit for you.
