Life is unpredictable. That’s why planning for the unexpected is crucial, especially when it comes to ensuring the financial future of those you love.
Life insurance provides a safety net for your family. It gives them financial stability to navigate life’s uncertainties. But, with so many different types of life insurance, it can be overwhelming to choose the right one.
The guide below can help you navigate the various types of life insurance policies available so that you can make an informed decision. Because when it comes to protecting your family’s future, there is no room for uncertainty.
Defining Life Insurance and its Benefits
Life insurance is an agreement between a policyholder and an insurance company.
The policyholder agrees to pay premiums in exchange for financial protection for their loved ones in the event of their death.
Many people who prioritize affordability in their life insurance policies opt for term life insurance. It provides short-term coverage, typically ranging from 10 to 30 years. During this period, if the policyholder dies, their beneficiaries receive a payout, referred to as a death benefit.
However, if the policyholder outlives the term, the policy expires, and the insurance company doesn’t pay out the benefits. But, there are other ways to navigate these challenges.
Understanding how life insurance works is critical for making informed decisions. So, take time to check all the pros and cons that come with different types of life insurance policies before you decide to make a purchase.
Types of Life Insurance Policies
According to a recent survey, around 50% of American households have some form of life insurance coverage. Households with higher incomes often have more people with life insurance.
Those who do invest in life insurance tend to do it for reasons such as income replacement and estate planning. Depending on the situation, people often choose between the 4 types of life insurance. These include term life, whole life, variable, and universal life insurance.
The table below can serve as a quick guide for comparing the different types of life insurance.
| Life insurance type | Coverage duration | Best for | Does it build cash value? | Do you need a medical exam? |
| Term | 10, 15, 20, or 30 years | People on a budget | No | Yes |
| Whole life | For life | People who need consistency and fixed premiums | Yes | No |
| Variable | For life | People with specific life insurance protection needs | Yes | Yes |
| Universal | For life | People with flexible insurance needs | Yes | Yes |
Term Life Insurance
Term life insurance is a straightforward, affordable, and popular type of life insurance policy. It offers protection for a specific period.
According to industry statistics, term life insurance is a preferred choice as it allows younger adults to save money. In 2019, 71% of people who had life insurance purchased the term life policy.
This insurance policy has a short-term focus and is a viable option for protecting your family from losing income. Compared to other contracts, the term policy is relatively inexpensive. This makes it a good safety net for achievable goals. For example, until you’ve paid off the mortgage or raised the children.
The payments stay the same for a set period of time. Even if the contract is coming to an end, you can renew the coverage or convert the policy.
However, term life insurance doesn’t provide cash value over time. Considering the policyholder needs a medical exam, it can be hard to qualify if there are any serious health complications. Every time the policyholder takes out a new term, the premiums can increase.
Whole Life Insurance
The whole life insurance contract is a permanent type of policy. It ensures lifelong coverage and accumulates cash value over time.
This policy is an excellent choice for people looking for asset growth opportunities and lifelong protection. A whole-life policy costs more than a term policy, but it doesn’t expire.
The premium payments of whole life insurance remain constant throughout the policyholder’s life. Plus, a portion of each payment goes towards building the policy’s cash value. Policyholders have the flexibility to borrow funds or make withdrawals from their policy.
In the event of the policyholder’s death, the beneficiaries often receive a tax-free death benefit.
One of the major advantages of whole life insurance is that it provides the policyholder with a guaranteed death benefit, regardless of their age or health, as long as they pay the policy premiums.
The actual downside is the cost. You can expect to pay 10 times more for a whole life policy than you would with a term policy. So, if you are already on a tight budget and can’t afford the expenses, it is best to avoid this type of life insurance. But, if you value consistency, fixed premiums, and accumulating cash value, then this could be useful life coverage.
Variable Life Insurance
Variable life insurance is another permanent life insurance policy type. It offers lifelong coverage and allows policyholders to invest in a range of investment options. This is a solid option for individuals who have high-risk tolerance for investment and need lifelong protection.
The great thing about this policy is that it allows the policyholder to create a customized portfolio. This portfolio aligns with their investment goals. It also comes with cash value and death benefits.
Variable life insurance policies make up a small portion of the life insurance market. Since variable insurance policy involves market investments, it does come with a market risk. The cash value varies based on your investments.
In other words, the better your investments, the more useful the policy. You can use it as a tool to build wealth. However, if your subaccounts are not performing well, then it can be difficult to make full use of an insurance policy such as this.
Because of this investment component, variable life insurance policies have higher fees and premiums than other types of life insurance policies.
So, if you have a long-term financial plan and great control over your investments, then you can make the most of the variable life insurance policy.
Universal Life Insurance
Universal life insurance is a more adaptable life insurance policy. It offers lifelong coverage and an investment component.
Based on the latest industry statistics, universal life insurance policies account for roughly 15% of all life insurance policies purchased in the United States.
Even though this policy is quite like the whole life, it comes with some extra features. It offers flexibility in the policyholder’s premium and death benefit. The contract enables people to pay less, more, or even skip payments. This is good for families whose financial situations may be changing.
But, this flexibility can also reflect on your cash value, loans, withdrawals, and interest rates. For example, if you are a policyholder with a higher cash value, then you can notice better flexibility compared to those with lower values.
Universal life insurance policies provide policyholders with the option to include riders. These are add-ons with some extra benefits. A policyholder can also set up the policy to include the cash value as part of the death benefit. This feature can lead to higher premiums. It can also result in a more substantial death benefit for your beneficiaries upon your passing.
Suppose, for instance, you have a policy worth $300,000 and an account value of $50,000. In that case, your beneficiaries will obtain a total of $350,000 when you pass away.
But, because this policy also has an investment component, you need to make sure that those investments meet your financial goals. This can be difficult to accomplish in a volatile market. This means you are exposed to risk and rising costs as you get older.
Final Expense Life Insurance
Final expense life insurance is a type of policy designed to cover the cost of a person’s funeral and other end-of-life expenses. It typically provides a lower death benefit than traditional life insurance policies. It has coverage ranging from $5,000 to $25,000, depending on the policyholder’s needs.
According to a 2021 survey by the National Funeral Directors Association, the average cost of a funeral, including burial or cremation, is around $7,800. With final expense life insurance, policyholders can have peace of mind, knowing their beneficiaries have the financial means to cover these expenses without dipping into their own pockets.
This type of policy is particularly popular among older adults who don’t want to burden their families with the cost of their final arrangements.
Other Types Of Life Insurance
Other than the 4 main types of life insurance policies we previously discussed, there are additional types of life insurance available on the market. These include Group Life Insurance, Accidental Death and Dismemberment (AD&D) Insurance, Mortgage Protection Insurance, and Long-Term Care Insurance. Each option has something unique to offer as listed below:
● Group Life Insurance – This is a type of life insurance policy that is typically offered by employers to their employees as a benefit. It provides coverage to a group of people, often at a lower cost than individual policies. The cost of group life insurance is often lower because the risk is spread out among the group. These policies have a set benefit amount. The benefit is paid out to the employee’s designated beneficiaries.
● Accidental Death and Dismemberment (AD&D) Insurance – AD&D insurance often pays out a benefit to the policyholder or other beneficiaries in case of a covered accident, such as a fall or a car accident. This insurance can be a valuable supplement to traditional life insurance policies. Especially for those who work in high-risk professions or engage in risky activities.
● Mortgage Protection Insurance – This type of insurance policy can help cover your mortgage payments if you become unable to work due to an accident, illness, or disability. This can be a practical policy for homeowners who want to make sure they keep their home in the event of an unexpected loss of income. It is important to point out that mortgage protection insurance is not the same as private mortgage insurance (PMI). PMI protects the lender in case the borrower defaults on their mortgage. While mortgage protection insurance protects the borrower and their family.
● Long-Term Care Insurance – This type of policy covers the cost of care for people who require assistance with daily living activities. Such as bathing, dressing, and eating. It is designed to have more flexibility than financial assistance from Medicare. These include in-home care, assisted living facilities, or nursing homes. You can consider getting long-term care insurance if you want to protect your retirement savings from the high costs of long-term care. Although the premiums can vary greatly depending on your age, health, and overall coverage, they are a popular option for seniors. Mainly because of the rising costs of long-term care.
Understanding the Different Coverage Options for Each Type of Policy
It’s necessary to carefully evaluate each policy’s coverage options to determine which one aligns best with your long-term financial goals and needs.
Here is a brief overview of the different coverage options available for the main types of life insurance policies:
– Term life insurance – This policy type has a limited timeframe coverage. It usually spans from 10 to 30 years. You can extend it or convert it to a permanent policy at any time during the stipulated term.
– Whole life insurance – This is a permanent life policy that offers lifelong coverage and a death benefit payout to your beneficiaries. Due to the cash value accumulation, this option ensures both protection and investment potential.
– Variable life insurance – This policy coverage is lifelong and a great option for those seeking long-term financial protection. The policy lets you invest in a range of sub-accounts that could potentially grow the policy’s cash value. If you are well-versed in investments, then this policy could earn higher returns. It also has better policy customization and a high level of control.
– Universal life insurance – This is another lifelong coverage policy. But, the coverage amount and premium payments can be adjusted over time according to the policyholder’s changing needs and financial circumstances. This policy often has a flexible premium and death benefit, which allows you to make changes to your coverage throughout your lifetime.
Choosing the Right Policy for Your Needs
Wondering “what is the best type of life insurance for me?” Selecting an adequate life insurance policy can be downright overwhelming. Even after you’ve figured out the differences between each type of plan.
However, you can decide which option to go for if you consider a couple of key factors. For example, to narrow down your search, try to:
- assess your financial situation,
- determine your long-term goals,
- and analyze the extra benefits and plan features.
Also, consider speaking with an agent. They can offer you personalized advice and guidance that can be beneficial when selecting your policy. With that in mind, the tips below can help.
Assess Your Budget
Determine how much you can realistically afford to pay every month.
Start by reviewing your monthly income and expenses to get a better overview of your financial situation. From there, you can set a realistic budget for your life insurance premiums. The more coverage you want, the higher the premiums will be.
For example, term life is often cheaper than whole life policy and can be a better fit for people on a limited budget. If you own a business, then group life insurance could be a more practical alternative.
Work with a financial advisor or insurance agent to choose a policy that meets your needs without breaking the bank.
Determine Your Long-Term Goals
To pick the proper coverage, you need to know your long-term goals. Your long-term goals can include things like funding your child’s education, paying off the mortgage, or leaving an inheritance. The policy plan should align with your financial objectives.
For example, if your long-term goal is to leave an inheritance for your loved ones, then it may be best to opt for the whole-life policy. The coverage is substantial and comes with a guaranteed death benefit payout.
On the other hand, if the long-term goal could be achieved in the foreseeable future, such as funding your child’s education, then term-life insurance could be a better fit. It works for a specific period of time and provides the necessary coverage to pay for their tuition and expenses.
But, if you are thinking about retirement planning, permanent life policies, such as whole life or universal life can be a suitable choice. Not only do these policies provide a lifelong death benefit, but they also stack cash value over time.
You can use this cash value to cover unexpected expenses or supplement retirement income.
Analyze the Extra Benefits and Plan Features
Each of the main life insurance types comes with its own set of extra benefits and plan features.
For term insurance, the main feature is its affordability and simplicity. You pay a fixed premium for a set term. The policy pays out a death benefit if you (the policyholder) pass away during that term. You can convert some term policies into permanent ones.
Whole life insurance has lifelong coverage and a fixed premium. It also has a savings component that helps you stack cash value. Variable insurance is very similar to whole life insurance. But this policy is directly tied to the performance of your investments.
If you need more flexibility in premium payments and death benefits than the whole-life policy and also want to save some cash, then the universal life policy may be a better fit. But it does come with fewer guarantees.
For example, if you only pay the minimum required premium on your universal policy for too long, it could negatively affect the growth of the cash value and overall size of the death benefit. This is because the minimum payment may not be sufficient to cover the cost of insurance charges and other expenses associated with the policy.
This causes the cash value to grow more slowly, or even decrease over time. So, it’s important to regularly review and adjust your premium payments. This way you ensure that your policy remains financially stable and can meet your long-term goals.
Exploring Other Options to Help Supplement Your Coverage and Reduce Premiums
When looking to supplement your life insurance coverage and reduce premiums, it is important to explore other insurance options that may be available to you.
One option to consider is adding a rider to your existing policy, such as a disability income rider or an accidental death benefit rider. These can provide additional coverage and protection without requiring you to purchase a separate policy.
Another option to consider is bundling your insurance policies. Many insurance companies offer discounts for customers who have multiple policies with them. Such as combining your life insurance policy with your auto or homeowners insurance. This can help you save on premiums while still maintaining the coverage you need.
Finally, you may also want to consider alternative insurance options. Such as a high-deductible health plan paired with a health savings account. This can provide you with coverage for medical expenses while also allowing you to save money on premiums.
Knowing How to Make Changes and Get Support With Your Policy When Needed
Remember: the key to a successful life insurance policy is keeping it up-to-date and aligned with your changing needs. Life events like getting married, having children, or buying a home can all impact your coverage requirements.
Understanding the process of modifying your policy can be daunting. Don’t hesitate to reach out to your agent or insurance provider for support and guidance. Take the necessary steps to ensure that you and your loved ones are adequately protected.
Conclusion
Choosing between the different types of life insurance can exhausting. Understanding their pros and cons can set you on the right track for making an informed decision. Don’t forget to consider your budget, long-term goals, and the policy’s individual features. If you need reduced premiums and better coverage, you can explore other options, like add-ons. With the right coverage in place, you can protect your loved ones’ financial future.