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.
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
- How to Shop for Life Insurance in Three Easy Steps
- 10 Things You Should Know About Life Insurance
- How Life Insurance Can Help You Preserve Your Wealth
- Three Big Ways That Life Insurance Can Be a Lifeline
- Don’t Let a Medicare Mistake Haunt Your Retirement
-
ESPN to Acquire NFL Network and RedZone in Exchange for 10% Equity StakeESPN will take control of NFL Network and RedZone, while the NFL secures a 10% stake in ESPN — a move that could change how fans watch football.
-
Stocks Rally on Apple Strength: Stock Market TodayThe iPhone maker will boost its U.S. investment by $100 billion, which sent the Dow Jones stock soaring.
-
I'm an Estate Planning Attorney: These Are the Two Legal Documents Everyone Should HaveEvery adult should have a health care proxy and power of attorney — they save loved ones time, money and stress if a sudden illness or injury leaves you incapacitated.
-
I'm a Financial Professional: Here's My Investing Playbook for Political UncertaintyFor successful long-term investing in a politically charged environment, investors should focus on economic data, have a diversified portfolio and resist reacting to daily headlines.
-
The Truth About the Dark Side of Rooftop Solar PanelsRampant bankruptcies in the solar panel industry have left many consumers with systems that don't work and no way to get them fixed. Worse, they're being hounded to keep paying despite not receiving what they were promised. What can they do?
-
Six Big Beautiful Opportunities: Advisers' Guide to Tax and Client StrategiesHere are several ways financial professionals can help their clients maximize opportunities in the One Big Beautiful Bill Act, which extends key TCJA provisions, introduces increased deductions for people 65 and older and more.
-
Five Ways to Maintain Charitable Giving During Volatile Times: A Giver's GuideWhen the economic outlook is uncertain, charitable giving is even more important — and impactful. You can be strategic by using donor-advised funds, diversifying assets and prioritizing unrestricted gifts.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
