Are you wondering about life insurance but overwhelmed by the options?
You’re not alone. Life insurance is an essential part of your financial picture and can help you plan for the future.
If you’re considering whether or not you need life insurance, think about this: more than a third of Americans would experience significant hardship if the primary income earner passed away, according to an Insurance Barometer study. Despite that, studies show more than 40% don’t have a life insurance policy to protect their finances.
The type of life insurance you should choose depends on several factors, including how long you want your policy to last and how much you want to pay.
What is Life Insurance?
The purpose of insurance is to protect you against financial loss. When it comes to life insurance, your loved ones are the primary consideration. If someone relies on your income for support, how will they make ends meet after you’re gone?
Life insurance works like other types of insurance. You buy a policy, pay monthly premiums, and the provider pays a cash benefit to your survivors if you pass away. The money can help pay off debt, cover funeral and burial expenses, and help your family survive financially.
The Different Type of Life Insurance Policies Explained
When deciding what kind of life insurance you should get, keep in mind that a one-size-fits-all policy doesn’t exist. Everyone has different priorities in life. The type that’s best for you depends on your situation.
Term Life Insurance
Term life insurance only lasts for a certain number of years, which works for most people because they only need financial protection for a specific amount of time.
Most people buy a term life insurance policy because they only need temporary coverage. Term lengths can range from 5 to 30 years. Term life tends to be the most affordable option because it provides coverage for a relatively short amount of time. Some people can buy a significant policy for as little as $20 to $30 a month.
Deciding how much coverage you want and how long you want it to last are the only two considerations. Many people pick a policy that is the same length as their mortgage or until their children are out of college.
- Straightforward and easy to understand
- The most affordable option
- Variety of term lengths to fit your needs
- Death benefit payable to beneficiaries
- Policy expires with no payout if you outlive the term
- Higher cost for a new policy when the original term expires
When to Choose It
Because of the short policy duration and affordable price point, term insurance policies are great for a broad range of people. If you’re a young adult and can’t afford the higher cost of permanent life, a term policy might be for you.
Married couples or those with dependents should also look into buying a term policy. It can often be enough to support your family if you pass away during your high-earning years.
Permanent Life Insurance
Unlike a term policy that expires after a certain amount of time, permanent life insurance is good for life as long as you pay the premium. Rather than being a specific type of insurance, it’s more of an umbrella expression that describes both whole life and universal coverage options.
Where term life only has a death benefit that is payable to your beneficiaries upon your death, permanent life insurance comes with a cash value. As it builds, you can borrow against it or withdraw the funds.
- Good for your entire lifetime
- Builds cash value
- Can be used as an estate planning tool
- Some policies are flexible
- Can be more expensive than term coverage
- Difficult to understand the many types
- Low investment returns
When to Choose It
Where term life is best for young families and those just entering adulthood, permanent life tends to fair better for those who are well-established. This is primarily due to affordability since permanent life tends to come at a higher cost.
If you want to build cash value to withdraw in the future to pay for a child’s college education or medical expenses, for example, permanent life might be your go-to option. The variety of investment options also makes it a good choice if you prefer a more hands-on approach.
Whole Life Insurance
The most significant advantage to whole life insurance is that it covers you for your entire life. Unlike term life insurance, a whole life policy never expires and it also builds a cash value.
Because your coverage doesn’t have an end date, it tends to be more expensive than a term life policy. Some find the whole life cash value, which is similar to an investment product, to be worth the extra cost.
The more permanent nature is also convenient. As you age, some health conditions may make you uninsurable if your term policy expires. But as long as you pay your premiums, your whole life insurance policy will stay in place.
- No expiration date – your policy is good for life
- Combines life insurance and investing using a cash value
- Useful in estate planning
- Fixed premiums
- Can borrow against the cash value
- Low investment returns
- Premiums are expensive
- Fees and commissions can be high
- More complicated than term
When to Choose It
Everyone can consider buying a whole life insurance policy though it tends to be best for estate tax planning or to cover the cost of care for a disabled child. If you own a business, it could provide a degree of liquidity upon your death if needed.
It could also work as part of a retirement investment strategy. If you max out your contributions to 401(k) plans and IRA options, a whole life insurance policy might make sense. It can come with high premiums and investment costs, so watch for fees to make sure it’s a good choice for you.
Universal Life Insurance
Universal life insurance is similar to whole life because it also has a cash value. It’s a little more flexible since it doesn’t require you to get a new policy if you want to change the premium and death benefit amounts. This is an attractive option, but can also be confusing.
Generally, the cash value part of the policy grows according to market conditions. You can also pay the premiums with the cash value. As you make withdrawals to cover the payment, the amount dwindles faster than it builds up, so this strategy won’t work for a long period of time.
When contemplating universal life insurance, you’ll pick from a few subtypes such as variable, guaranteed, and indexed. The main difference is the option for how to invest the policy’s cash value.
- Less expensive than whole life
- Grows cash value
- Flexible payments and benefit amount
- Can withdraw or borrow against cash value
- Cash value can fluctuate
- High fees and administrative costs
- Variations in types can seem confusing
When to Choose It
The different types of universal insurance, such as variable, guaranteed and indexed, give you several options on how to invest the cash value portion of the policy.
For those looking to vary the coverage over their life, having the flexibility to change the amounts of the premium and death benefit is an attractive option. This is useful if you want to reduce the life insurance payout as the balance of your mortgage declines.
Term vs. Whole vs. Universal vs. Permanent Life Insurance
|Cash Value||No||Yes||Depends on the policy||Most Often|
|How Interest Grows||N/A||Predetermined fixed rate||Variable||Depends on the policy|
|Cost||Most affordable option||More expensive option||Middle-of-the-road||Generally higher cost|
Life Insurance FAQs
Before you choose a life insurance policy, let’s talk about whether or not it’s necessary for your situation.
Do I Need Life Insurance?
If you provide income that someone else relies on, you should consider life insurance. Single parents, married couples, stay-at-home moms, and business owners could all benefit from having a life insurance policy in place.
What is the Cheapest Life Insurance for Over 50?
The cost of life insurance rises as you age and also depends on medical conditions and lifestyle habits. To get the cheapest rate, it’s always best to compare prices from different policies and providers.
Generally, it’s best to stick with a term life policy if you’re over 50. It’s often the most affordable, and sometimes coverage is available without a medical exam.
Which Type of Life Insurance Should I Get?
Most likely, someone in your life relies on you financially. If you pass away, that person could benefit from you having a life insurance policy.
There are many different policies, term lengths, and coverage amounts to compare. To know which type of life insurance is best depends on several factors. If you’re looking to keep costs down, a term policy may suit your needs. Opting for permanent coverage through whole or universal life can extend the financial benefit and open up new options.