There are different types of permanent life insurance. All of them have a death benefit, which is paid to your beneficiary when you die. Where they differ is in how the savings component–or cash value — is calculated.
- Whole life insurance is a policy in which part of the premiums go toward a savings account. With whole life insurance, youâ€™re guaranteed a certain death benefit, as well as a certain cash value by a certain date.
- Universal life insurance is a policy in which part of the premium goes toward a savings account that can be tied to an adjustable interest rate. As a result, you have fewer guarantees about how much money youâ€™ll ultimately make than with the whole life policy.
- Variable universal life insurance is the riskiest type of policy in that the savings component is invested in the stock market, so you could end up with a lot of coverage or a little depending upon how the market performs.
When choosing between the different types, donâ€™t get dazzled by all of the features of permanent life insurance policies, suggests Tony Steur, an insurance literacy advocate and author of Questions and Answers on Life Insurance: The Life Insurance Toolbook. Think instead about what you actually need.
Dos and Donâ€™ts of buying life insurance
- Do some research. The insurance industry group LIFE has a financial calculator to help you calculate your life insurance needs at http://www.lifehappens.org/life-insurance-needs-calculator/
- Do make sure the agent or broker is licensed to do business in your state. â€śInsurance is regulated at the state level, so state insurance departments are charged with licensing life insurance agents and brokers,â€ť says Michael Barry, a spokesman for the Insurance Information Institute.
- Donâ€™t depend solely on the life insurance provided by your employer. If the company changes the benefits package or if you change jobs, the policy may expire.
- Donâ€™t overlook life insurance for a stay-at-home parent. A non-working adultâ€™s death could cause financial hardship too.