Life insurance’s primary goal is to help cover the costs associated with your funeral and burial, but your policy can be used for much more. The insurance coverage you get will help your surviving loved ones pay for your remaining debts and taxes, or it can be used to help your spouse or children financially recover from their loss. The right policy can even benefit you throughout your life by acting as a long-term savings vehicle, but only if you start your policy early enough. The following guide will help you understand more about the types of life insurance policies you should consider.

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How Does Life Insurance Help?

There are several different ways that life insurance can help you and your loved ones in the future. As you begin paying into your policy, you’ll build up ownership of the policy that will help you use your policy as an asset. For example, once you have been paying into the policy for several years, you will have built up a cash value. You can choose to borrow against that cash value amount to help you cover unexpected expenses. While this means repaying the borrowed amount with interest in addition to keeping up with your regular premiums, it is an available option for financial emergencies.

After you have passed away, your insurance policy will be cashed out and remitted to the beneficiaries you have chosen. Typically, beneficiaries would be spouses or partners and minor children, although you can choose almost anyone. Your beneficiaries can use the money to pay for your funeral and burial costs, replace the household’s income as a result of your passing, or help pay a mortgage off.

Additionally, other common ways a life insurance policy helps are listed below:

  • Boost retirement income
  • Cover home care costs
  • Pay off probate taxes and debts.
  • Pay for a child’s college education.
  • Pay for medical care.
  • Make a gift to children.

What is Term Life Insurance?

The type of benefits you’ll receive from maintaining a life insurance policy will depend on the type of policy you obtain. While you can pay less in premiums for a term life policy than a whole life policy, you also won’t enjoy the same benefits. A term life policy only applies for a predetermined number of years, usually lasting anywhere from five to 20 years. Once the time limit expires, you’ll no longer pay premiums, and the policy will no longer be valid.

You can continue coverage with a term policy by renewing your policy via your insurance agent. However, if you forget to renew, it’s important to understand that death benefits won’t be paid out upon your passing. Many people prefer this type of policy because the premiums are lower, and they continue to renew at the end of each term.

Is Whole Life Insurance Better?

Unlike term life insurance, a whole life insurance policy will endure until you either cancel the policy or until your death. Since you can borrow from this policy and it lasts throughout your lifetime, you should expect the premiums to be higher for the same coverage amount.

Paying more into this type of policy is beneficial because it will ultimately allow you to cash out. After several years of paying your premiums, you would have contributed as much as the policy will pay out upon your death. When you reach this point, your insurance company will let you know that you no longer need their coverage. At that point, you can cash out the policy and transfer your money into a savings or retirement account.

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What Should You Know About Universal Life Insurance?

A universal life insurance policy provides all of the benefits of a whole life policy, but it also offers a few extras. Primarily, the universal policy pays interest on the amount you contribute towards your policy’s savings. You can take advantage of the interest by contributing more than your minimum premium, so your savings will grow faster. Once you create a cash value in your universal policy, you can skip payments without having to pay the penalty. Together, the features of a universal life insurance policy maximize what you can save over several years while also helping you recover from a bad month or financial emergency.

How Much Does Coverage Cost?

Your life insurance cost will depend on how much coverage is sufficient in your situation, which is why no hard and fast rule applies to everyone. The best method for determining what your loved ones will need after your death is to use the DIME formula, which is described below:

  • Debts and Taxes – Create a list of your debts, but don’t include your mortgage. This list should also include an estimate for your funeral and burial expenses.
  • Income – Take your net annual income and multiply that your family will need to rely upon your earnings by the number of years. Usually, this should be as long as it will take for your youngest child to graduate from college.
  • Mortgage – This is where you’ll plug in the total amount needed to pay off your mortgage.
  • Education – Here, you should add to the total cost of education for all your children. This should include everything up to college and graduate school.

Once you have calculated all of these variables, you can add them together to determine your policy’s total amount of coverage. A simpler solution is to multiply your annual income by 10, but that won’t take into account any variables that would increase your debts and financial obligations.

The amount of coverage you need will be factored in with your age to determine the rate of your monthly premiums. By working with an insurance agent, you can adjust your coverage to fit your budget and make your premiums more manageable. As your situation changes through the years, reviewing your policy with your life insurance agent on an annual agent will help you adjust your coverage. Overall, your life insurance policy should reflect the needs of your family throughout your lifetime.