Types of Life Insurance: Finding Affordable & Adequate Coverage
Mr. Miller can’t sleep. He knows his life insurance policy isn’t enough to provide for his wife and children should something unexpected happen to him. He’s not alone. 41% of Americans don’t carry any life insurance at all. And of those that do, a third are like Mr. Miller, with only a basic group policy from their employer that will barely cover funeral expenses.
But with so many different types of life insurance out there, how can Mr. Miller and nearly half of America find one that’s affordable yet provides adequate coverage?
Don’t worry, Mr. Miller. We know sorting out life insurance options isn’t easy. That’s why we’ve put together an interactive guide that will not only explain each type of policy but give you scenarios to help you understand its coverage. Let’s get you covered.
Life Insurance 101
Before we dive in too deep, let’s give you some basic definitions so you understand everything we’re about to go over.
Beneficiary: This is the person(s) who will receive life insurance proceeds in the event of the insured’s death. You can have single or multiple beneficiaries.
Death benefit: This is the lump sum payout from the insurer to the beneficiary upon the insured’s death. There are other options as well though. Beneficiaries, with some policies, can choose from annual payments, monthly payments, or a combination of payments.
Insured: Typically, but not always, the owner of a policy and who the policy is on.
Insurer: The life insurance company providing the policy. The insurer is sometimes called the carrier or provider.
Policy: A life insurance policy is a legal contract between the insurer and insured. The policy contains details, terms, costs, fees, etc.
Rider: Insurance policy provision that ensures your coverage meets your unique needs. A rider must be added to an existing policy and cannot be purchased on its own.
There are two main types of life insurance available. Knowing the difference between these two is the first step towards finding the best policy for you and your family.
Term insurance: This type of policy covers the insured for a certain period of time. Because it has an expiration date, you’ll find premiums for term insurance are typically less expensive than whole-life insurance. But with limited coverage, there’s less peace of mind.
Permanent insurance: This type of policy doesn’t expire. As long as you’re paying, you have coverage. You’ll find this type of insurance to be more expensive than term and its value can change over time but with coverage you can count on for an indefinite number of years, you can sleep better at night.
This concludes your life insurance 101 crash course. Now let’s find the perfect policy.
Different Types of Life Insurance – Which is Best for You?
We’ve given very basic definitions of the two main types of life insurance. Wouldn’t you know though that there are more than one of each type? What we haven’t mentioned is that these main types can be broken down even further. We’ll be exploring the most common types of life insurance policies and explaining who they’re best for to help you find the one perfect for you.
Term Life Insurance
What is it? The most common type of policy sold, term life insurance coverage pays the face amount of the policy to your beneficiaries, helping them through the financial loss that results from your death. It gets its name from the fact that it is good for a specified period of amount of time, or the term. Terms can vary from 5 years, 10 years, or go as long as 30 years.
With term, your premiums don’t contribute to a cash value, so they are usually much lower than the cost of whole life. The main thing about term insurance is that once the premiums are set they stay the same, each year, for the duration of the term.
While coverage is available at the end of the term period the premiums usually skyrocket. It is important to keep in touch with your agent, throughout the course of your term insurance policy, to make sure that your needs are being met and that you don’t get surprised, at the end of the fixed term, with a large premium increase.
Who is this for? Term life insurance is a great option for Mr. Miller and most healthy adults looking to get coverage. You can choose the length of your plan and pay minimal premiums. When comparing term to permanent, you’ll often find that premiums of the same amount equate to much different benefits. The premium for a young male, like Mr. Miller, could earn him $1,000,000 in coverage with term but only $100,000 in a permanent policy.
Term life insurance can also be converted to a permanent policy at the end of the term or if the insured is diagnosed with an illness and is unable to secure a new policy. But this isn’t always the case. Make sure you look for this policy option as it could mean the difference between being able to obtain life insurance or not should age or illness became a factor. Should you choose term insurance, make sure your policy includes this rider as it can be a huge benefit.
A variable of term life insurance to also consider is return of premium term life insurance. It’s also available with long term lengths, up to 35 years. Should Mr. Miller make sure this rider is included with his insurance, his policy essentially acts as a savings account. Let’s say he pays $125 a month for 30 years. This adds up to $45,000. Upon the end of the term, assuming Mr. Miller is still alive, the insurer would have to pay out the full amount of premiums paid.
Permanent Life Insurance
This is an umbrella term that refers to policies that can’t be cancelled as long you pay your premiums. The only exception is in case of fraud. It accumulates a cash value up to the date it is set to mature.
The advantage is that the owner of the policy has access to the money that accumulates. He can do this by borrowing against it, withdrawing it, or surrendering the policy and in return being paid the surrender value. The downside is that these policies cost more the older you get.
Here is a look at the three types of permanent life insurance.
Whole Life Insurance
What is it? The most common type of permanent life insurance is called whole life insurance. It applies part of your monthly payment to insurance, part to company administrative costs, and part to the cash value portion of the policy. This investment portion is tax-free until you choose to withdraw it.
Also known as participating whole life, this type of policy lets you use the cash value to pay your premiums, giving the owner a level of flexibility for payment.
Who is this for? Whole life insurance is great for retirement planning. If you’re further away from this step than most, whole life probably isn’t for you, especially if you’re a parent with young children who would need to be provided for if early death were to occur. We wouldn’t recommend it for Mr. Miller. But if you want flexibility with your paid premiums to take advantage of investment opportunities, whole life is a great option.
Universal Life Insurance
What is it? Universal life insurance is also called flexible or adjustable life. This variation of whole life provides benefits based on the current interest rate, just like other permanent policies, but in addition it allows the owner to adjust the premiums, cash value, and level of protection. This is helpful for many families because over time insurance needs change.
The interest rate, guaranteed not to drop below a certain level, is adjusted by the insurance company at certain points in response to market conditions.
Who is this for? There are a few different types of universal life policies so they’re great for those who truly need a custom policy, such as those with preexisting conditions or serious illnesses. Flexible death benefits can be tailored until age 90, 121, and several in between. Because there are guaranteed universal life insurance policies available that don’t require medical exams, this policy would be best for someone who put off insurance during their healthier years or has been turned down for multiple policies in the past.
Variable Life Insurance
What is it? This type of policy combines whole life with an investment fund. It has a general account, which is the insurer’s liability account, plus a separate account made up of investment funds that are part of the insurer’s portfolio, like equity funds and money market funds. It is called variable because the value of the cash and death benefit usually fluctuates.
Who is this for? This is definitely not the life insurance policy for everyone. We don’t typically recommend it as a first life insurance choice. Instead, it’s a great addition to a diversified portfolio. We may recommend this to Mr. Miller down the road when he’s more established and interested in a unique way to invest.
As you can see, there is a wide range of options when it comes to all the different types of life insurance. Most likely you have questions about which policies offer the best fit for your needs. We’re here to help.
