Types of life insurance
Life insurance can be divided into three basic categories: term life insurance, whole life insurance, and universal life insurance.
Term Life Insurance – Provides coverage for a fixed duration of time (e.g. 20 years). The policy only pays a death benefit if the insured individual dies before the policy expires.
Whole Life Insurance – These policies guarantee coverage up to a certain age (usually age 95 or 100) and provide cash value, which means that they can be liquidated for cash in the event the insurance is no longer needed.
Universal Life Insurance – These policies can be maintained indefinitely and are often referred to or defined as “Lifetime” coverage. These policies carry minimal cash value and allow for flexible payments of any amount at any time (up to certain government-stipulated maximums).
Choosing the right life insurance policy
Two questions present difficulty for most life insurance buyers:
- How big of a death benefit do I need?
- How long do I need coverage?
The simplest answers to these questions can be provided by determining “How much income or revenue your family or business would need on an annual basis to maintain their current financial well-being?” and “How long your family or business needs the protection?”
- Most people need a death benefit at least 8 to 12 times their annual income.
- Wage-earners need coverage for at least as long as they expect to be gainfully employed.
- Homemakers need coverage for at least as long as their dependents (children, invalids, etc.), who need care, will be in the home.