Types of life insurance and how to choose the right one

Everyone knows how important it is, yet many procrastinate the discussion around it, and, at some point or the other, repent not having done the needful at the right time. We are talking about life insurance. Having the right kind of life insurance is a vital component of financial planning, and the sooner people get it, the better. As one gets older, life insurance becomes costlier as one has to pay a higher premium and go for multiple health check-ups. 

However, finding the right kind of insurance and the coverage that meet one’s goals and budget can be a bit challenging as there are way too many options floating around. With a little bit of guidance from well-established financial advisors, one can make the correct decision as per individual needs. 

The importance of life insurance

Life insurance is vital in order to protect your family's financial future. It enables you to leave a non-taxable amount for your family after your death. It can also be used to cover your mortgage and your personal loans, such as your car loan. Individual life insurance will give you coverage for as long as you keep paying the premium, unlike corporate insurance, which is applicable only as long as you are employed with the specific company. 

Life insurance will supplement the family income so your loved ones can maintain their quality of life even after you and your income are gone. It is not wise to depend on just your savings; even if you have put aside a certain amount of money, it is unlikely that it will be enough to cover your family's expenses for long, should something happen to you unexpectedly. Besides, it is always better to have an additional corpus of money for your family other than just your savings. A life insurance policy can enable you to accumulate savings, thus maximizing the income you will have after you retire. 

The different types of life insurance

There are several types of life insurance policies that can protect you and your family. They fall into two main categories: Term and permanent. Here’s an overview of both and the main features of each. 

Term Life Insurance

Term life insurance comes with a specific end date for the policy. Once the term is over, you can either terminate the policy or renew it. Most types of term life insurance policies will attract higher rates with each passing term. Life insurance providers will offer you term options of either five or 10, 15, 25 or even 30 years. Term life insurance is a pure life insurance plan, giving you the widest coverage. It is the cheapest and most basic life insurance because you are required to pay for only the coverage and not the cash values.

• Upside

Term life insurance is good for those who want coverage for a specific debt or situation. You can buy it to cover your working years and ensure income replacement for your family in case you pass away. You can also buy it to cover the term of a mortgage or other debt.

• Downside

In case you need coverage after the term is over, renewal could be expensive. And buying a new life insurance policy would be even more pricey as you will have aged and health conditions might have arisen by then. 

Whole Life Insurance

Whole life insurance provides life-long coverage. This kind of policy generally builds cash value over time as part of your premium and the accrued interest. The premium does not increase, the benefit upon death remains the same, and the rate of return on the cash value remains fixed. However, the premiums for these policies are generally higher than those for term insurance. The advantage is the premium remains constant, no matter how old you get.

• Upside

Whole life insurance is best for those who want life-long coverage and are willing to pay for the guarantees provided by the policy.

• Downside

This kind of policy is generally expensive. 

Universal Life Insurance

This type of life insurance policy is a bit complicated as the features are different for different service providers and markets. It is cheaper than whole life insurance as it does not offer the kind of guarantees that whole life insurance does. Some universal life policies allow you to vary the amount to be paid as a premium and organize the death benefit amount within certain limits. Such policies generally come with a cash value component.

• Upside

This kind of policy suits those looking for lifelong coverage, and, at the same time, hoping to tie their cash value gains to market performance. 

• Downside

This kind of insurance is complicated as it has to be monitored constantly to ensure that the fees and charges do not deplete your cash value and cause your policy to lapse. 

Variable Life Insurance

Variable life insurance offers permanent coverage with cash value. You can choose the sub-accounts to invest in and determine the growth of the cash value account. Gains are not guaranteed in this kind of policy. 

• Upside

This is good for those who want life-long coverage and have a high-risk appetite. 

• Downside

You can lose money on your death benefit and cash values if your investments do not generate the expected returns. 

Burial and Funeral Insurance

This is a small whole life insurance policy, intended only to pay for funeral costs and other final expenses. 

• Upside

This insurance policy assures people who do not have other forms of insurance, and who are in poor health, of a decent burial and coverage of funeral costs.

• Downside

Such policies can be expensive; they have a limited purpose but are not cheap. 

Survivorship Life Insurance

This is a kind of joint life insurance policy that covers two people under one policy (a husband and wife, for example). The pay-out to beneficiaries is made after both have passed away. It is generally less expensive than buying two separate life insurance policies. 

• Upside

Survivorship life insurance enables couples with a high net worth to provide money to their heirs for estate taxes. It is also good for those who want to donate to charities. 

• Downside

This does not provide any financial benefits to the surviving policy partner. The pay-out is made only when both have passed away.

Mortgage Life Insurance

This policy covers only the balance of a mortgage. The death benefit is paid to the mortgage lender; not the beneficiary. The pay-out is the balance of the mortgage, or partial balance, depending on what has been insured. 

• Upside

This policy is good for those who are primarily concerned about their family being burdened by the mortgage if they pass away. 

• Downside

Mortgage life insurance does not provide direct benefits to the surviving members. It lacks financial flexibility.

Credit Life Insurance

Credit life insurance covers a specific debt. When you take out a loan, this policy could be useful. The life insurance pay-out is the balance of the debt, but it is paid to the lender, not the family.

• Upside

This policy is good for you if you are worried about how your family will pay off your loans after you pass away. It is convenient as it doesn’t require a medical exam.

• Downside

Credit life insurance is very narrow and does not allow financial flexibility. 

Supplemental Life Insurance

This type of insurance is also known as group life insurance. It covers groups, not the individual.

• Upside

Supplemental life insurance is free or inexpensive. It is good as supplementary coverage to your own individual life insurance policy.

• Downside

The policy is active only as long as you are employed with the company providing this insurance. It is best to have your own life insurance as well. 

To conclude, there is a mind-boggling array of life insurance policies to choose from. Ultimately, the kind of a policy you choose depends on your goals — whether you are focused on the wealth creation aspect, whether you want basic coverage at a low premium, whether you want to insure only your life, or that of your spouse as well, whether you have an estate to protect, whether you are worried about your funeral, and so forth.

If you assess your insurance needs carefully and examine your financial goals, you will be able to choose the right kind of insurance. But it is always better to take the advice of experts who have hands-on experience in dealing with different case scenarios and outcomes. At the Continental Group, not only will you get sound advice and guidance regarding the kind of insurance you should buy, but also find a team that is ready to address any of your related queries at all times.