Which Type of Life Insurance Is Right for You?
Life insurance isn’t a one-size-fits-all option. Here are the differences between term life, whole life and indexed universal life insurance.
![The words life insurance are written on a sticky note on top of a spiral notebook next to a calculator.](https://cdn.mos.cms.futurecdn.net/dNF8qA2YkKkxvNzT4Bm9Af-415-80.jpg)
![Jay Dorso](https://cdn.mos.cms.futurecdn.net/WRLQpGcbHWcXbtxf2DnxS6.jpg)
When you think of your life insurance plan, what is the first thing you think of? For many, it’s being thankful there is a plan in place to help your family financially after you pass away. While this is an important component, there are more benefits to having life insurance.
Life insurance is meant to help your family cope with the loss of income when you pass by paying out a benefit. However, some life insurance policies have a cash value component and can also be used to save for retirement. While we all know the importance of having a life insurance plan, there are a few options to choose from. Each has benefits, but to pick a policy that is right for you, the key is to know their differences.
Term life insurance
The most common type is term life insurance. These plans provide a death benefit that will pay beneficiaries over a specific period of time. Once the term expires, you can either renew it, let it expire or convert it to a different type of life insurance. With these plans, the only value is the guaranteed benefit after you pass. They do not feature any other savings components.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Premiums for this plan are usually based on your age, gender, health and how much the policy would pay out if you pass away. In some cases, you may have to go through a medical examination to determine your qualifications. They may ask you questions about your current medications, smoking status, occupation, family history or hobbies. If you pass during the policy term, your beneficiaries will receive the cash benefit. This is typically used to settle your funeral expenses, health care costs or any type of debt you may have had.
While this is the most common practice for this payment, there are no restrictions on how the money can be used.
Whole life insurance
Unlike term life insurance, which lasts a specific amount of time, whole life insurance policies are one of several policies that are permanent. This means you are covered for your entire life, and as long as you continue to pay the premium, your policy will never expire. Whole life also has a cash value component, which you can draw on or borrow from as the policy owner. Part of your premium will go toward the death benefit and part will go toward the cash component.
This cash value offers a benefit to you while you are still alive, unlike other insurance plans. You can request a withdrawal of funds or a loan. There will be interest on these loans, but the rates are typically lower than you would see with a personal loan. However, it is important to know that if you decide to withdraw or borrow against your policy, you will be reducing your death benefits.
Indexed universal life insurance
Indexed universal life insurance is another permanent option for life insurance. Similar to whole life insurance, this also has a death benefit as well as a cash value component. With indexed universal life insurance plans, you may see higher earnings. This is because it is tied to a well-known stock market index such as the S&P 500 or the Nasdaq-100.
If you have an indexed universal life insurance plan, you can borrow against the cash you accumulate in the policy. Keep in mind that if you don’t pay it back, the money is deducted from the death benefit.
An attractive feature of these plans is their flexibility. You can increase your premiums or lower them during times of hardship. The cash value that you build up can be used to lower or potentially cover your premiums without subtracting from the death benefit.
Embrace the benefits of life insurance
Don’t depart from this earth leaving your loved ones with huge bills. Most of us know the importance of having life insurance, but many don’t have the proper education on which plans to consider. Life insurance is not a simple, one-size-fits-all decision, so I always recommend working with a financial adviser who can help you find the right policy for you.
Related Content
![Jay Dorso](https://cdn.mos.cms.futurecdn.net/WRLQpGcbHWcXbtxf2DnxS6.jpg)
Jay Dorso has more than 25 years of experience in the financial industry. At Quality Senior Benefits, Jay specializes in helping seniors with every area of retirement planning. From Medicare plans to insurance and long-term care, Jay helps set his clients up for success in retirement. Quality Senior Benefits is an independent firm that offers a wide range of insurance and financial services products.
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published