Personal Finance

How to Pick the Life Insurance That's Right for You

Life insurance is more than simply an "umbrella" that protects you and your family. Life insurance can also be an investment . As such, you need to select the correct type of life insurance to ensure it meets your singular situation as an individual and an investor.

Before you start, here's a quick tip: the purchasing power of any life insurance you buy today will be eroded over the years by inflation . Inflation may not be a factor if you are purchasing a term life insurance policy for only a few years, but if you are considering a policy with a longer time horizon -- say, 20 years or more -- or if you are obtaining whole life insurance quotes, the effect of inflation should be part of your equation. For example, a household budget of $50,000 per year swells to nearly $100,000 per year if we experience annual inflation of +3.5% over the next 20 years.

Below is a guide to the most common types of life insurance, with advice on how to determine which is best for you.

Term Insurance

As its name denotes, term insurance pays out a death benefit for a specific pre-determined period of time -- a "term." Most term policies expire before the insured dies and consequently never pay a claim. So, not surprisingly, this type of life insurance tends to be the most affordable.

Term insurance is quite simple to understand: it pays a death benefit and has no additional cash value. It's not an investment; it's straightforward insurance protection. Term life insurance premiums often stay the same for the entire period. This type of insurance is best suited for young married couples with limited means who are just starting out.

Whole Life Insurance

In this type of policy, both the premium and the death benefit stay at the same level during the entire course of the policy. To maintain level premiums, whole life insurance premiums are higher for younger individuals and lower for older individuals (as compared to the trend with term insurance premiums), because mortality rates get higher as a person gets older.

These policies are more flexible than term insurance and offer financial tools beyond a death benefit. Because part of each premium is set aside for the participant, whole life policies steadily build cash value over times and provide policyholders with the security of knowing that they will never get more expensive -- only less so. Policyholders who terminate their policy before they die are entitled to the built-up cash value and may borrow against these cash values as well. In a whole life policy, death benefit and premiums are guaranteed; the respective insurance company conservatively invests the cash values.

Whole life insurance is best suited for individuals who expect evolving financial needs during their lifetime and have low tolerance for investment risk.

Universal Life Insurance

Universal life insurance, as with whole life insurance, provides cash value accumulation and permanent death benefit protection. However, unlike whole life insurance, universal life offers a death benefit that you can calibrate to your needs, flexible premium payments, and cash values that are tied to current interest rates.

Universal life policies pay out a current interest rate comparable to prevailing rates paid by money market accounts. These rates aren't guaranteed for the contract's lifetime; they fluctuate with market conditions. Universal life insurance is best for those investors willing to accept greater risk and uncertainty, in return for the potential upside of benefiting from higher interest rates.

Variable Universal Life Insurance

Variable universal life insurance provides policyholders with the most useful investment tool kit. It's generally similar to universal life insurance, but you can direct your insurance company to invest the underlying cash value in several portfolio sub-accounts. Carriers typically offer the usual equity and fixed income options. This way, you can apply your life insurance cash value according to your own personal asset allocations model.

This type of policy confers the most risk to the policyholder, but it also makes possible the greatest opportunities for gains. As an investor, you can integrate your variable universal life insurance policy with your entire portfolio, adding yet more diversification to your investments.

To learn more about using life insurance to meet your investing goals, read these other featured articles from InvestingAnswers : How Much Life Insurance Should You Own and How ToLeverageYour Gifts To Charity .


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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