The decision to purchase life insurance is daunting enough without considering the many types of life insurance. The purpose of life insurance is to protect your family’s financial future in the event that you pass unexpectedly, so it’s important to choose the best type for your needs.
Life insurance is generally divided into two categories: term life and whole life. While term life insurance suits most people’s needs, there are other coverages out there that may protect your family better financially.
Everyone’s circumstances are unique. Educating yourself about the different types of life insurance can help you purchase the right coverage and make sure your family is taken care of if you pass.
What Is Term Life Insurance?
Often referred to as pure life insurance, term life is life insurance that has a specific end date. It is meant to be a temporary protection against financial hardship in case of the insured’s passing.
Term life insurance offers lower premiums than whole life due to the temporary nature of the policy.
Term life insurance is often sold in periods of ten, fifteen, twenty, and thirty years. Ideally, the term length should coincide with your overall financial plan.
The average person’s financial responsibilities include paying off a mortgage, college expenses, any outstanding debt, and other living expenses.
You should account for any expected expenses and how long you expect to have them when considering which term length to purchase.
Term life’s lower premiums are due in part to the fact that they are contributing only to the death benefit coverage. At the end of the term, there is often the option to renew the policy or purchase a different term length.
However, these premiums tend to be much higher due to the insured’s older age and any potential health issues that may have emerged over the years.
Who Needs Term Life Insurance?
Most people don’t need a life insurance policy for their entire lives.
The purpose of life insurance is to protect your beneficiaries from financial hardship in the event of your death.
In accordance with your financial plan, the term life policy should last long enough to ensure that those who depend on you can maintain their current standard of living if you pass unexpectedly.
It is also worth considering Return of Premium Term Life Insurance. The difference here is if a person outlives the term, they are entitled to the full return of all premiums paid.
What Is Whole Life Insurance?
Whole life insurance covers you from the time you purchase the policy to when you pass. As long as premium payments are made on time, there is a guaranteed death benefit on the life of the insured.
Whole life insurance provides a level of certainty and stability that term life does not.
One of the many benefits of whole life insurance is that there is no fluctuation in premium payments. The price you pay today will be the same fifty years down the road, regardless of changes in health or older age.
Whole life insurance also allows you to build up funds that you can borrow against in the future, known as cash value. This is a notable benefit that term life does not offer.
Cash value acts as a form of forced savings and can be used for anything. It is worth noting that cash value is tax-deferred, so your account will be subject to taxation when you do decide to withdraw.
Whole life insurance often gets a bad rap because it offers the same level of coverage at a much higher premium. While the cash value element adds certain value, whole life can be difficult to justify if your circumstances do not demand it.
Who Needs Whole Life Insurance?
The decision to purchase whole life depends on your lifestyle and financial circumstances more than anything else.
Whole life insurance is best for people whose heirs will need life insurance premiums regardless of when they pass away. Those with special needs dependents might consider whole life insurance.
Whole life insurance can also be good for estate planning. If your heirs will need assistance managing your estate, it is best to have a policy in place that makes the transfer as smooth as possible.
Other Types of Life Insurance
As the insurance industry grew and evolved, other types of life insurance began to emerge under the larger umbrellas of term and whole life.
They can often be written as additional coverages within your policy, so it is important to understand the following types of life insurance to determine if it fits your coverage needs.
Decreasing and Increasing Term
Decreasing and increasing term refer to changes to the death benefit over the course of the policy.
In a decreasing term policy, the death benefit decreases over time while the premium generally stays the same. Those who wish for the remaining amount of their mortgage to be paid may consider a decreasing term policy.
The death benefit and mortgage amount will decrease over time until, eventually, both are gone entirely. Alternatively, increasing term coverage offers an increasing death benefit with a relatively stable premium.
Increasing term life insurance would be best for someone whose financial needs will increase with the death benefit, such as a young parent or newlyweds.
Mortgage Life Insurance
As the name implies, mortgage life insurance covers the remainder of your mortgage in the event that you pass unexpectedly. Its benefits can also be triggered in the event that your health renders you unable to work.
You are often given the option to purchase mortgage life insurance when you are signing paperwork to begin the mortgage on your house.
If you decline, there is often a lot of paperwork you must sign to indicate that you are refusing this coverage. The purpose of this is to put a foot in the door and force you to reevaluate your decision.
While mortgage life insurance can offer your family peace of mind, it is a decreasing benefit at its core.
You can almost always get a comparable coverage with a standard term life insurance policy, where your family is the beneficiary instead of the bank.
Those who are having trouble receiving a term life insurance policy may consider getting a mortgage life policy when they buy their house.
It is most important to remember that life insurance is there to protect all of your family’s financial needs in the event of your death – not just your mortgage.
Universal Life Insurance
Universal life insurance is a whole life policy that offers the best of both worlds – a low-cost death benefit and a cash value build up. A universal life insurance policy offers more flexibility than a traditional whole life policy.
The insured has more control over how much premium goes towards the death benefit and how much goes towards the cash value.
Similarly, variable life is a type of universal life insurance that allows you to invest your cash component into a variety of investment options.
With this coverage, your cash value funds have the potential to increase or decrease in value with the marketplace. Variable universal life is good for those who would like to use their cash value as an investment vehicle.
No-Exam Life Insurance
A no-exam life insurance policy does not require an insured to complete a medical exam to obtain coverage. They can be written as either term or whole life policies.
The best candidate for a no exam policy would be someone that is considered by the insurance company to be “high risk”.
Because there is no examination to determine eligibility, the premiums will be much higher than if a medical exam were performed.
Survivorship Life Insurance
Survivorship policies insure two lives instead of one. Unlike other life insurance policies, the benefits are only triggered after the second insured passes.
Because there are two lives being insured instead of one, the underwriting guidelines for these policies tend to be much more lenient. The policy will likely be approved, even if one of the insureds would not be eligible for a single life insurance policy.
Spouses will often purchase a survivorship policy to assist their children with paying estate taxes after they have gone. It can also assist in the transition of assets.
What Should I Consider When Purchasing Life Insurance?
There are two common situations in which a life insurance policy is not necessary: when no one is depending on your income or if your assets are large enough to care for dependents if you pass.
If neither of these scenarios applies to you, you will likely need life insurance. The best way to determine the best life insurance policy for you is to consider what expenses will be left to your dependents if you pass.
If they will be left with a mortgage, college expenses, and other living expenses, you should account for this in the death benefit. It is also wise to account for whatever your salary is that they would be without.
Be sure to consider if you have circumstances that demand whole life insurance. There are simply times in your life when you need certainty about the future well-being of your family.
If you are unsure if you need whole life insurance, read our post about the reasons to buy whole life insurance. Quotes vary from company to company, so make sure you shop around when you are in the market for insurance.
Also, be sure to discuss your decision to purchase life insurance with an insurance professional. Life insurance is meant to protect those you love, so do not make the decision alone.