Types of Life Insurance and How to Choose a Life Insurance Coverage Amount?

 Types of Life Insurance

Term life insurance

According to the Insurance Barometer Report, in addition to being the most affordable type of life insurance, term life insurance is the most popular type of life insurance sold (71% of buyers).

Term Life Insurance provides coverage for a fixed period and the premium payment remains the same for the term of the policy. Typical options are policy length 10, 15, 20, 25 or 30 years.

If you die within the term of your policy, your beneficiaries can claim and receive the death benefit amount, tax-free.

After the policy expires, you may be able to renew the coverage in one year increments, known as guaranteed renewal. But renewal will be at a higher rate each year.

Permanent life insurance

Permanent life insurance provides lifetime coverage. It is more expensive than term life because it:

• Can last for the duration of your life.
• Usually creates cash value.

The cash value component is credited on a tax-deferred basis for the lifetime of the policy. It serves as the saving part of the policy. Typically, you can borrow or withdraw at the cash value of the policy. If you decide to terminate the policy, you can get cash value by deducting any surrender fee.

In some policies the cash value may increase gradually over several years, so do not immediately calculate access to a very high cash value. Your policy illustration will show the estimated cash value.

There are several types of permanent life insurance:

• Whole life insurance offers a fixed death benefit and cash value component that increases at a guaranteed rate of return. Many full life insurance policies pay dividends that can be used to reduce premium payments or add to your cash value.
• Universal life insurance often offers more flexibility than the entire life insurance policy. You may be able to change your premium payment and death benefit within certain limits. With a universal life insurance policy, cash value will be created depending on the type of policy. For example, an indexed universal life insurance policy will have a cash value linked to an index such as the S&P 500. A variable universal life policy will usually have investment sub-accounts that you can choose and manage.
• Burial insurance is a short life insurance policy with a small death benefit, often between $ 5,000 and $ 25,000. Burial insurance is designed to cover funeral expenses and funeral expenses only.
• Survival life insurance or "second life insurance" insures two people under one policy, usually a married couple. When both the spouses die, the policy pays death benefit to the beneficiaries. Typically, survival life insurance is part of a larger financial plan to fund a trust or pay federal property taxes.

How to Choose a Life Insurance Coverage Amount

A good rule of thumb to estimate how much coverage you need is:

• Add all the expenses you want to cover, such as income replacement for your work, a mortgage and children's college expenses.
• From that, deduct the amounts your family can use to cover those expenses, such as savings and existing life insurance. Leave retirement savings if your spouse needs it later.

The resulting number is how much life insurance you need. This may sound high, especially if you have been focusing on income replacement for many years. However, life insurance quotes are free, so you have no problem paying for the coverage you need.

If it becomes affordable, you can buy what you can buy right now to lock in at a good rate. You can buy more later, just be aware that many years from now your rate will be based on your old age and any health condition you have developed.

Here is a calculator that helps you estimate how much life insurance you will need.