There are many life insurance plans on the market, so it’s easy to get confused while shopping for coverage. Should you purchase just enough coverage for final expenses, or do you require more? Do you need permanent or term insurance? And what’s the difference between whole life and universal life? Unraveling these answers is a little easier when you have good information. With help from this quick guide, you can make better sense of your options.
How Much Insurance Do You Need?
“You need enough life insurance to cover your obligations after you’re gone,” says NerdWallet’s Barbara Marquand. But that’s just the short answer. The longer answer depends on how much your dependents will need for living expenses, debt, education, and your funeral. PolicyGenuis estimates that the average funeral costs between $8,000 and $10,000, but this can vary according to where you live and the options you choose. End-of-life expenses, which can include unpaid medical bills, could tack on an additional $20,000.
Another NerdWallet piece explains that your estate is responsible for most lingering debts. These usually include mortgages, home equity financing, auto loans, and credit card debt. Some obligations, including federal student loans, are discharged after you die. Before you shop for policies, you should have a clear picture of your debts. Depending on your family situation, you may need to include education costs and replace your monthly earnings until your loved ones can survive without them.
What Is Permanent Life Insurance?
Permanent life policies do not expire, regardless of the insured’s age. Investopedia explains that each policy includes a death benefit plus a savings component that builds cash value. Your premiums keep the policy in force while adding to its cash value. Depending on the policy’s features, you can borrow against that cash value or cash it out after a certain period.
Permanent life insurance typically comes in two forms: whole life and universal life. Whole life provides coverage for the insured’s lifetime plus savings growth at a consistent rate. Universal life allows adjustable premiums and death benefits, with a “cost of insurance” amount that keeps the policy in force. Any premiums paid above and beyond the COI accumulate in the policy’s cash value, which earns interest based on a minimum interest or current market rate. Keep in mind that death benefits aren’t usually considered taxable income, but there may be taxes on cash value withdrawals.
What Are Term Life Policies?
Investopedia also provides a quick guide to term life insurance, which pays a stated death benefit if the insured person dies during a specific term. Unlike permanent life, term life policies do not accumulate cash value. If you purchase a term policy of $50,0000, for example, that face value is the death benefit your beneficiaries will receive.
Premiums are typically calculated using the insured’s age, health, and life expectancy. However, you may also be asked about your family medical history, driving record, hobbies, occupation, and any medications you’re taking. Insurers use these questions to assess your risk and determine how much you pay in premiums.
Most policies come with 20-year terms, but terms of 10, 15, or 30 years may be available. If the insured individual dies during the policy’s term, the insurer pays the full death benefit. The benefit is usually exempt from taxes and can pay for your funeral, lingering debt, and other expenses. Term life policies expire, but some allow renewal with new premiums calculated based on your current age.
Considering Your Family’s Future
There’s more to life insurance than universal, whole, and term life, but these basic products offer unique benefits. Your family’s financial situation and needs should dictate what kind of insurance you buy. The usual advice applies: Compare policies and select one that offers the best options at the lowest price.
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