Which type of life insurance is best suited for your needs?

Which type of life insurance is best suited for your needs?
Which type of life insurance is best suited for your needs?

If you're not around to financially support your family, life insurance can safeguard their future. However, comprehending its operation and selecting the appropriate policy type may be challenging.

Discover the various types of life insurance and determine which one is best suited for you, as well as how to purchase a plan.

What is life insurance?

A life insurance policy is a contract with an insurance company that provides a payout to a beneficiary if the policyholder dies under covered circumstances. In exchange, premiums are paid either monthly, quarterly, semi-annually or annually. The payout, called a death benefit, can help the beneficiary with daily living, the cost of a funeral or large expenses like a mortgage or a child's college education. Additionally, some policies pay dividends or accrue a cash value that the policyholder can use to pay premiums, increase their coverage or take as cash.

Permanent life insurance, which lasts as long as you keep paying premiums, can be further categorized into two subtypes: whole life and universal life.

Term life insurance

A term life insurance policy typically offers the most affordable coverage, with a set term of 10, 20, or 30 years. If you pass away before the term expires, your beneficiary will receive the stated death benefit. However, if you outlive the term, there will be no payout.

There are several types of term life insurance:

  • Your premiums and death benefit remain constant throughout the duration of your term policy.
  • At the conclusion of each term, a renewable term policy can be renewed, typically up to a specific age. However, rates may increase with each renewal.
  • If you survive the term of your return of premium policy, you may be eligible for a refund of some or all of your premiums, but there is usually an additional fee for this feature.

Both Guardian and Bestow are top picks for term life insurance because they allow policyholders to convert to a permanent policy without a medical exam or offer up to $1.5 million in coverage without one.

Pros and cons of term life insurance

Whole life insurance

While term life insurance policies offer a fixed monthly premium and guaranteed death benefit, whole life policies also include a cash value component that can be utilized while still alive to pay premiums, withdraw or borrow against.

A whole life policy guarantees coverage until a specified age, typically between 90 and 121, as long as premiums are paid. If the policyholder outlives the age on the policy and does not request an extension, they will receive their death benefit, and in some cases, their cash value component.

Whole life insurance is more expensive than term life policies with the same death benefit, with prices ranging from 5 to 15 times higher. Additionally, due to its complexity, purchasing a whole life policy typically requires working with a broker or advisor rather than enrolling online.

One of our top picks for whole life insurance is MassMutual, which provides numerous options for personalized coverage.

Pros and cons of whole life insurance

Universal life insurance

Universal life insurance offers the flexibility to adjust premiums while maintaining cash value and a death benefit.

There are three types of universal life insurance:

  • UL offers a cash value component that earns interest with flexible payment options.
  • The cash value growth of indexed universal life (IUL) is linked to the performance of a market index, such as the S&P 500, within a specified range.
  • The cash value component of variable universal life (VUL) funds is invested in the stock market.
  • A more affordable life insurance policy with a guaranteed death benefit but limited cash value is known as Guaranteed Universal Life (GUL).

Pacific Life offers a range of policies, including UL, IUL, and VUL, with numerous investment options. Protective provides guaranteed universal life insurance with a return of premium rider at no extra cost.

Pros and cons of universal life insurance

Final expense life insurance

A final expense or burial insurance policy may be suitable if your objective is to alleviate the financial burden on your loved ones during your funeral and other end-of-life expenses.

AARP offers final expense insurance with coverage up to $30,000, underwritten by New York Life. This policy is typically guaranteed acceptance, meaning it does not require a medical exam, and has fixed premiums. The policy can be used to cover funeral and burial expenses, medical bills, and other related costs.

Pros and cons of final expense insurance

Group life insurance

Group life insurance is a common benefit offered by companies to their employees, but it may not be sufficient if you have dependents on your income. The payout from group life insurance is typically only one or two times your annual salary, which falls short of the ten times experts recommend purchasing.

If you leave your job, the policy will end. It may be possible to purchase additional coverage through your employer. This supplemental insurance can be beneficial if you have difficulty qualifying for a standalone policy, but it may be more expensive for young and healthy individuals.

Pros and cons of group life insurance

How much life insurance do I need?

The amount of life insurance you require is largely determined by your age, income, and objectives. Experts typically recommend purchasing enough coverage to replace ten times your annual salary. For instance, someone earning $75,000 should have at least $750,000 in coverage.

The DIME method is another way to estimate the amount of insurance needed. It involves adding up any outstanding debts, lost income, remaining mortgage, and expected education expenses for children.

If your objective with life insurance is to cover final expenses, generate income, or create a financial legacy, you may require a different level of coverage. Consult with a financial advisor or insurance agent to explore your alternatives.

How to choose the right type of life insurance

Ask yourself some questions, including:

  • How much can you afford each month for life insurance? If it's limited, term life insurance may be the best option to safeguard your loved ones during your peak earning years.
  • How long is your mortgage for, and how many children do you have to put through college? Ensure you purchase sufficient coverage to cover these expenses.
  • Can you tell me about your family situation? Do you have children? Are they young or almost grown up? Do they have special needs that require your constant care? If so, a permanent policy may be more suitable.
  • If your objective is to safeguard your family in case of income loss, a term policy may suffice. However, if your aim is to establish an inheritance for your family or a charity, a universal policy could be a more suitable option.
  • If you're older or have pre-existing health issues, a final expense policy without a medical exam may be the best option for your health status.

How to shop for a life insurance policy

Choosing the right insurer and policy is crucial when committing to a policy for decades. Consider these factors.

1. Choose the policy type you want

If you want a term, whole life, or universal life policy, you may need to work with a broker or financial advisor.

2. Decide how much coverage you want

To estimate your payout, you can multiply your salary by 10, but there are many factors to consider, such as your age, health, family size, and financial goals.

3. Get quotes from several insurers

You can obtain quotes from insurers online and compare their term life policy offerings while shopping.

A broker can assist you in obtaining a permanent insurance policy since rates for these policies are not accessible online.

4. Complete the application

To complete the insurance company's application, you will need to provide personal information, lifestyle details, financial information, occupation, and family and personal medical history. Additionally, your driving record, travel plans, and credit score may be used to determine your rates.

5. Undergo a medical exam

Typically, the insurance company will send a medical professional to your location to conduct an exam and collect data and blood samples. However, if you are unable or unwilling to undergo an exam, there are some no-exam life insurance policies available.

6. Purchase your policy

If approved, you will sign the policy documents, make your first premium payment, and select your beneficiaries. However, if you want your minor child to receive your death benefit, you may want to name your spouse or an alternative guardian as the beneficiary.

Typically, life insurance policies include a time frame for reviewing the terms and conditions, which varies by state but is usually between 10 and 30 days, allowing you to obtain a refund if you're not content.

Is life insurance worth it?

If you have dependents who rely on your income for daily expenses or significant debts such as a mortgage or college education, life insurance is most beneficial.

Paying for medical care can be beneficial if you have a terminal or long-term illness, need to cover funeral expenses, or want to invest or finance a loan.

The suitability of life insurance depends on various factors such as income, age, dependents, and goals. It is advisable to consult with your family and a financial expert to determine the most suitable coverage.

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by Liz Knueven