Choosing Life Insurance

Choosing Life Insurance

by Rebecca Hall on 15 Feb, 2011

Choosing life insurance can be a baffling process if you don’t know the jargon. It is important to remember that these terms are not designed to trick you, however they do speak volumes about the complexity of insurance. Put simply, every single person who undertakes an insurance policy will be in a completely different situation to one another and as such there are many different types of insurance needed to cover them all.

There are two main types of life insurance. Knowing the difference is crucial to choosing the right policy for you. The two types are known as Term Life Insurance and Permanent Life Insurance. You will inevitably encounter these terms when searching for life insurance.

Term Life Insurance is so called because it only covers you for a specified term, or period of time. This type of policy is usually inexpensive and will expire at the end of a set term (usually five, ten or fifteen years). This type of policy is often purchased as a means of replacing a person’s income if they die unexpectedly.

As an example, if somebody purchases this type of policy for a ten year term and they die within those ten years then their family will receive the money from the insurance. However, if they do not die within those ten years, they wouldn’t receive any money from the policy, and they can then choose whether or not they wish to renew the insurance for a further ten years.

Because it offers great coverage for a lesser amount of money, term life insurance is often the most popular choice for life insurance policy holders. It is also a popular choice for new parents or families with young children because it is cheap and can provide a huge amount of coverage and protection. The most important consideration for most of these policy holders is replacing income and earnings to support their families in the event of an unexpected death.

Permanent Life Insurance usually costs more but covers you for the rest of your life (unless of course you choose to cancel your policy or stop paying your premiums). Premiums of this type are usually more expensive than Term Life Insurance because it entirely depends on each person’s health and age.

The expense has been known to be ten times higher than Term Life policies with similar coverage, but the main difference is that it gains cash value over time. This means that a percentage of your premium payments go into cash value, which after a certain amount of time, you will have access to. Term Life Insurance is different in this respect as you get no cash after the term is over.

Permanent Life Insurance is more expensive because you pay for both your premiums and your cash value. The cash value is then used by your insurance company as an investment, but is then later paid back to you in the future. Because of this, these kinds of insurance policies have the same level of premiums instead of regularly increasing premiums.

Making the choice between which type of insurance policy to choose from can be quite difficult, and each policy will benefit different people in different ways. Although there are benefits from a permanent life policy, there is a chance that you could overpay for the benefits that you will be getting in return. As with all financial situations, it is always a good idea to shop around so that you can ask questions and compare policies before making any decisions.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.