Life insurance 101
PROS & CONS OF DIFFERENT LIFE POLICIES
Term Life Insurance
How it works: You have to make only two decisions if you buy term life insurance: what amount you want and how long you want the coverage to last.
- Pros: It’s easy to understand and is the cheapest way to buy life insurance. You can compare term life insurance quotes online.
- Cons: You could outlive your policy. If you still need coverage when the policy expires, you’d need to buy another policy and will pay more based on your age and, possibly, health.
Whole Life Insurance
How it works: Whole life insurance doesn’t expire. It’s the closest thing to “set it and forget it” life insurance. As long as you pay the bill, you don’t have to think much about the policy. Your payments stay the same, you get a guaranteed rate of return on the “cash value” investment component of the policy, and the death benefit amount doesn’t change.
- Pros: It covers you for your entire life. Everything in the policy is guaranteed, so there are no surprises.
- Cons: It’s a very expensive way to buy life insurance.
Guaranteed Universal Life Insurance
How it works: These policies promise a certain death benefit, and payments don’t change. There’s typically little or no cash value within the policy, and insurers demand on-time payments. Missing a payment could mean you forfeit the policy. And since there’s no cash value in the policy, you’d walk away with nothing if you forfeit. If you’re sometimes late with bills, this is not the product for you. In addition, consider that future financial or health problems could cause you to miss a payment.
- Pros: It’s cheaper than whole life and other forms of universal life insurance. You can choose the age to which you want the death benefit guaranteed, such as 95 or 100.
- Cons: You must make every payment on time or you could lose the guarantee and forfeit the policy, thereby losing all your previous payments. The policy may have little or no cash value.
Indexed Universal Life Insurance
How it works: Indexed universal life insurance links the policy’s cash value component to a stock market index like the Standard & Poor’s 500. Your gains are determined by a formula, which is outlined in the policy.
- Pros: You can access cash value, which grows over time. The cash value is linked to a stock market index, so if the stock market goes up, you get some upside, too. Within limits, your payments and death benefit amount are flexible.
- Cons: Your cash value doesn’t take full advantage of stock market gains. Understand the policy’s fees and participation rates and the cap on your return before you buy.
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