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How to Select The Type of Life Insurance You Need

Deciding to take out life insurance is daunting enough; it becomes even more difficult when you’re confronted with the sheer variety of life insurance policies that are available. To make it easier for you to choose, here are the different types of life insurance that you can take out and why you might want to choose this particular kind of insurance.

There are two main types of life insurance – permanent (or cash value) and term insurance. Permanent insurance provides coverage throughout the entire life of the policy holder as long as the premiums continue to be serviced. It is also called cash value since a portion of your premiums is allocated to savings that accumulates over time.

Cash value is different from the face value of your policy. The face value is the death benefit that is paid to your beneficiary if you die while the policy is active. Cash value is the amount that you will receive if you surrender your policy before your death. But you don’t need to give up your policy to benefit from the cash value – you can borrow against it, use it to pay your premiums or buy more coverage or change the policy to annuity that would provide an income for life.

There are three types of permanent insurance – whole, variable and universal – which are distinguished by the options available to the holder in setting benefits and premiums and choosing the investments your premiums will be placed in. In whole life, premiums and benefits remain constant throughout the life of the policy and the cash value increases at a fixed rate. Variable life allows you to select investments and thus, the value of your death benefits and cash value are not guaranteed (although death benefits generally have a floor), but premiums are generally fixed. Universal life insurance, on the other hand, provides you with the most flexibility in selecting premiums and benefits, as well as selecting investments; however, there are no guarantees other than the original face value of the policy.

Term insurance, on the other hand, only provides coverage for a certain period of time – ten or twenty years, for example – and pays benefits only in the event of your death during the coverage period. Premiums are either fixed for the life of the policy or increase at various points as specified in the policy. Some term life policies also come with a return of premium benefit at the end of a term although the premiums for these types are generally higher. They can also be renewed although premiums will generally increase upon renewal.

So which type should you get? For the majority of insurance buyers, a simple whole life is enough to meet their insurance needs. If you are more affluent, however, and have a higher tolerance for risk, then you might want to go for universal or variable life insurance. On the other hand, if you only want to ensure that your family can pay off a mortgage or continue a child’s college education, then you might want to consider term insurance.

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