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Life insurance is a type of insurance policy. It provides financial protection for those who depend on you. When you’re covered by life insurance, the policy pays out a death benefit if you pass away. The beneficiaries you designate to receive the death benefit can use this money to replace your income. They can also use it to pay for the services you provided.
Some life insurance policies are also a type of investment vehicle. They acquire a cash value. You can borrow against them. And with the best life insurance companies, you also have options for withdrawing some money or cashing in your policy.
You can also buy more protection from the best life insurance companies. These are called riders. They’re another form of protection in addition to the death benefit. For example, you may have the option to add long-term care insurance. Or you may be able to get guaranteed income for your family.
Want to protect your family? Check out The Ascent’s guide to the best life insurance for families.
Types of life insurance
There are two primary types of life insurance: “term life” and “whole life.” While both provide a death benefit, they have some important differences.
Term life insurance
Term life insurance is a type of life insurance in effect for a set period of time. It pays out a death benefit to your designated beneficiaries if you die while coverage is active. It is solely a life insurance product, with no investment component.
Term life insurance is much more affordable than whole life insurance. That’s especially true if you shop around for the best life insurance companies. In fact, whole-life premiums often cost four times more than a term life policy. However, term life insurance gets its name because it’s in effect only for a limited period of time. It’s common for policies to have a 20- or 30-year coverage term.
If you pass away while your policy is in effect, the insurance company will pay a death benefit. This money goes to whomever you designated as beneficiaries. You can choose the amount of your death benefit. Some policies could provide millions in coverage. The best life insurance companies give you a wide choice of coverage amounts. However, the larger your death benefit, the costlier your premiums.
If you don’t die while your policy is in effect, your policy will simply expire at the end of the term. Your death benefit will never be paid out. With the best life insurance companies, you may have the option to buy a guaranteed renewable term policy. That means you can extend your term of coverage if you’d like. But premiums could go up when your life insurance coverage renews.
Whole life insurance
Whole life insurance is a type of life insurance policy that remains in effect for your entire life as long as you pay premiums. As long as you don’t let your policy lapse, your insurance will pay out a death benefit when you die. Whole life policies also have an investment component and acquire a cash value that you can borrow against or cash out.
You won’t have to worry about whether you can renew your coverage. And you won’t have to think about whether your premiums will go up. Whole-life policies are much more expensive than term life insurance. That’s true even with the best life insurance companies. But as long as you keep paying premiums, your beneficiaries eventually get the death benefit.
One reason whole-life policies are more expensive is that they are also investment vehicles. That’s true even with the best life insurance companies. Your policy accrues a cash value over time. You’re eventually able to access it. You can withdraw some of the money, borrow against your insurance policy, or surrender your policy.
There are tax benefits associated with investing in a whole life insurance policy. However, many financial experts believe you can earn a better return on investment elsewhere. Most recommend buying term life insurance from the best life insurance companies and keeping your investments separate unless you need life insurance coverage.
Term life vs. whole life insurance
The first decision to make when buying life insurance is whether to buy a term life or whole life. Here’s a rundown of which policy type is best for specific needs, along with the pros and cons of each.
Term life insurance:
Best for: Term life insurance is best for people looking for the most affordable insurance protection for a limited time.
Pros
- Lower premiums than whole life insurance
- Death benefit never changes
- Option to add coverage features
Cons
- No lifetime coverage
- Premiums can increase during policy renewal
- The policy doesn’t pay out if the policyholder passes away outside of the coverage term
Whole life insurance:
Best for: Whole life insurance is best for people looking for lifetime protection and a policy that also serves as an investment.
Pros
- Lifetime insurance coverage
- Premiums never increase
- The policy serves as an investment that acquires cash value
Cons
- More expensive premiums than term life insurance
| FEATURE | TERM LIFE | WHOLE LIFE |
|---|---|---|
| Most affordable premiums | Yes | No |
| Lifetime coverage | No | Yes |
| Premiums never increase | Premiums can increase if the policy renews | Yes |
| Has an investment component | No | Yes |
| Acquires a cash value | No | Yes |
| Death benefit never changes | Yes | Yes |
| Option to buy riders to add coverage features | Yes | Yes |
What does life insurance cover?
Life insurance coverage insures against the loss of your life. If you pass away, your beneficiaries receive a payment. You can also add riders or optional additional coverage. The best life insurance companies offer many options for riders to customize their coverage. The most important coverages are listed below, along with common riders.
Accidental death
Your beneficiaries get an additional payout if you die as a result of an accident. This is commonly referred to as the death benefit. With the best life insurance companies, beneficiaries often receive double the death benefit from the accidental death rider. The death benefit is the most important coverage.
Long-term care
This adds long-term care insurance. Long-term care coverage can be purchased separately. However, bundling your coverage means you avoid having to buy an additional policy. The insurance will cover you if you have to go into a nursing home. It also pays for long-term care at home.
Family income benefit
Your loved ones will receive regular monthly income for a period of time if you die.
Return of premium
Premiums paid for term life insurance are returned if you don’t pass away during your term of coverage.
Waiver of premium
Premiums are waived if you become permanently disabled. This means you can keep your life insurance coverage even if you can’t work.
Is life insurance worth it?
Policies from the best life insurance companies can often be purchased at a very affordable cost. That’s especially true if you opt for term life insurance. If you have loved ones depending on your income, buying a policy ensures they aren’t faced with financial disaster if you die. Your death benefit could pay off your family’s mortgage. Or it could pay for your child’s education.
Life insurance is also worth it if you provide important services to your family. These could include acting as a stay-at-home parent or caring for elderly relatives. If you pass away, your loved ones could use the death benefit to bring in paid assistance. If you have a business with others, a life insurance policy could also provide money for your partners to buy out your interest after your death. Or they could pay someone else to continue your work.
For those with a need for lifetime income — such as parents of disabled children –, life insurance can also be a lifesaver. A policy could ensure money is available to support their children for life.
Of course, to make sure your policy is worth paying for, it’s important to understand your coverage options carefully. You’ll want to research term insurance vs. whole life insurance. You’ll also want to research riders to see if paying for the additional coverage is worth it. And you should get quotes from at least three different insurance agents. This will help you find the best life insurance companies for your situation.
Life insurance can give you peace of mind as well as make sure you’ve provided for those you care about. Shop around for quotes today with no obligation to find out how much a policy will cost and determine if life insurance is right for you.
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