The Importance of Choosing the Right Life Insurance Policy

The Importance of Choosing the Right Life Insurance Policy

May 29, 2024

Are you familiar with the benefits of life insurance? Tax-free life insurance policy benefits can help your family cover end-of-life expenses, funeral and burial costs, and pay estate taxes. The same policy also can benefit you and your family during your retirement years. Now that April 15 tax reporting is behind you, is this a good time to talk this over with your financial professional?

 

The most common types of life insurance

·       Term Life

Term life insurance does not build any cash value. Depending on your purpose, its term can range from 1 to 30 years. There are also declining term policies, sometime purchased to match the remaining term on, say, a mortgage obligation. With a fixed death benefit, term life insurance ordinarily is less complex and also less costly than life insurance policies that build cash value. It’s ordinarily bought to provide for cash flow in the unexpected event of inability to continue earning cash flow that covers essential living expenses. Like the mortgage, or paying for children’s education.

 

Pros:

It is generally the cheapest and simplest type of life insurance.

 

Cons:

Beneficiaries won’t get a payout if you outlive your policy.

There’s no cash value to tap for tax-free income.


·       Variable Life

Variable life insurance is a permanent – as opposed to ‘term’ -- life insurance policy. Policy premiums build what is known as a cash value account that invests typically in mutual funds. Or, to limit the extent to which the policy’s cash value rises and falls with market volatility, issuers ordinarily offer access to a fixed account with a guaranteed rate of return. Variable life insurance pays a death benefit to your beneficiaries after you die.  

 

Pros: Returns of variable policies may provide tax-free income.

 

Cons: These policies are considered more volatile than other forms of life insurance.

 

 

·       Whole Life

This a permanent form of insurance that generally lasts for your whole life so long as premiums are paid. Premiums typically remain the same throughout your life, as does the death benefit. Like variable life, whole life insurance policies build cash value. Premium paid are usually applied first to insurance costs, with the remaining portion going into a cash value account. The cash will accrue over time based on the contract rate; when the cash value reaches a predetermined amount, it is available for tax-free policy loans.

 

Pros:

This type of insurance is less complicated than some of the other permanent choices, plus you are generally covered for your entire life, and you can grow a cash value account.

 

Cons:

It is more costly than the cheaper term life insurance option.

 

·       Universal Life

Universal life insurance is a type of permanent life insurance that offers the flexibility to adjust premium payment amounts and potentially may offer greater cash value growth over time. There are different types of universal life policies; it is critical to understand the differences. 

 

Pros:

This type of insurance may be cheaper than, for example, whole life insurance.

 

Cons:

Not all universal policies guarantee you will have cash value growth.

 

 

·       Burial Insurance

A type of policy designed to cover the expenses your loved ones would be responsible for in the unfortunate event of your death. Your coverage should last your whole life as long as you make payments. Payment options can usually be either monthly or in one large sum annually.

 

Pros:

Because it typically doesn’t require a medical examination, this may be a suitable option if you have a pre-existing condition that prevents you from a whole or term life insurance policy. Another benefit is no restriction on how the payout can be used.

 

Cons:

These policies are often expensive, and there may be up to a two-year waiting period to get signed up. If you die before the waiting period ends, your beneficiaries won’t get anything.

 

Consult your financial professional

Different types of life insurance have different features, costs, and benefits. Whether and how any of them might be useful to you, and which might best serve your purposes, depends on your financial situation, your goals, your financial risk tolerance, and your timeframe. We’ve named only a few of the pertinent factors.  Consider consulting your financial professional to review your life insurance options in preparation for retirement and ensure your family is cared for.

 

Important Disclosures:

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

 

Sources:

Variable Life Insurance (investopedia.com)

5 Different Types of Life Insurance - NerdWallet

Understanding Universal Life Insurance – Forbes Advisor

What Is Burial Insurance? | Progressive

Whole Life Insurance: Pros and Cons (investopedia.com)

 

This article was prepared by LPL Marketing Solutions

 

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