Life Insurance Simplified: A Guide to Your Options
Learn the basics of whole life and other options to decide what’s right for you.
If you were to pass away today, could your family afford your mortgage payment and other financial obligations without your income? If the answer is no, you should consider a life insurance policy.
While the ideal time to buy a life insurance policy is when you’re young and healthy—a time when premiums are less expensive—it’s never too late to buy one. People often consider them after certain life milestones, such as marriage or the birth of a child, to help protect their loved ones’ financial future.
To help you better understand life insurance and which type might be right for you, here are some common options and how they work:
Term Life insurance
This is a popular type as it usually is the least expensive option, but it only provides protection for a specified time, such as 10, 20 or 30 years. It’s typically bought in five-year increments, and can be considered similar to paying rent: It doesn’t build cash value or equity. After the term is up, the coverage will end and if you want to get another policy it will be based on your health and age at that time.
With some policies you can add options such as riders to help you customize your policy. One option with life insurance through AAA is a Return Of Premium rider, where you can get all premiums paid back (this option isn’t available on a 10-year term). Automatically included is a conversion option that allows you to convert your Term Life to a permanent policy.
Good for: If you need extra coverage for a specific period of time, such as while paying off a mortgage or when you have children at home.
Whole Life insurance
Generally more expensive than Term Life, Whole Life is considered a permanent life insurance option—or a policy that doesn’t expire.
Whole Life insurance provides death benefits for covered claims as well as cash value accumulation, which you can borrow during the life of the policy. You can also use the cash value to help pay your monthly premium. You’ll need to repay any loans against your policy to ensure your death benefit isn’t reduced.
Good for: Lifelong coverage, and if you want the flexibility to use the cash value later in life.
Universal Life insurance
Similar to Whole Life—it’s also a permanent life insurance option—Universal Life offers greater flexibility. You can put in a target premium or a lump sum. After your initial target premium payment, you can make additional premium payments at any time and in any amount—so you could choose to pay for the policy over several years or over your lifetime. Like Whole Life, you can borrow the cash value off your policy like a loan or use it to help pay for premium payments.
Good for: Lifelong coverage, but with flexibility in how you pay for the policy.
Annuities are helpful as a supplement for retirement planning. An annuity produces a series of regular income payments for either a period of time or for life. It allows you to earn interest now (based on fixed rates) and pay taxes only when the earnings are distributed. If redeemed early, it’s important to know there is a surrender charge or early withdrawal penalty that can be up to 10 percent.
There are different kinds of annuities that are designed to meet different needs and stages of life.
- Deferred annuity delays income payments until you elect to receive them. You also place money into the annuity over time—think of it as saving for retirement.
- Immediate annuity has you contribute a lump sum to the account, and then you can start receiving benefits immediately. These work well if you’ve received a large amount of capital, such as an inheritance or winning the lottery.
Good for: Retirement saving and if you want to have guaranteed retirement income.