Question 2: What type of life insurance should I buy?
For residents who answered “yes” to Question #1, the answer for nearly everyone is simple: level term. Most other types of policies mix investment with insurance and offer a lower value than you would get from handling each of these separately.
In this section, we will briefly outline life insurance policy terminology (see Table 1), types of policies, and key features of each policy type. This information has been included to provide an overview of the life insurance landscape; however, unless you have highly unique financial circumstances, know that a term policy is likely to be most affordable and offer the best value for financially protecting your dependents in the unlikely event of your death.
Table 1. Life insurance terminology
Types of Life Insurance Policies
There are two main categories of life insurance: term and permanent.
The defining characteristic of term policies is that they offer a predetermined death benefit for a specific period of time (i.e., the policy term), after which they expire. There is no cash value in term policies.
Permanent policies do not automatically expire and can be maintained throughout the entire life of the insured, provided that premiums are paid. Permanent policies also have a cash value component. These policies are a mixture of investment and insurance products, the price of which is typically higher than dealing with each of these financial areas separately. Accordingly, permanent life insurance is not recommended for residents. Table 2 compares several characteristics of different life insurance policy types.
Table 2. Types of life insurance policies
The realm of life insurance can get quite complicated. Again, though—unless you have highly unique financial circumstances as a resident, level term insurance is likely the most appropriate option for financially protecting your dependents in the event of your death.