What type of life insurance is best for you? Deciding which product is right for you can depend on quite a few factors like how long the policy should last, the purpose of the policy and even how much you are willing to pay.
What is term life insurance?
Term life insurance pays out a benefit to your beneficiaries only if you die within a specified timeframe, usually 10, 20, or 30 years. This is the best option if you want to protection for the years that matter most (when you still have a mortgage & children in the house). Term life insurance is also the most affordable form of life insurance.
For 95% of young families, term life insurance is the way to go. Having life insurance protection for longer than you actually need it for may not seem like such a bad thing. But why pay for something you don’t need? Term life insurance lets you pay for coverage only during the years when you’ll need it (most likely in your 30s, 40s and 50s).
What happens when term life insurance expires?
After the term expires, you have a few options:
The most likely scenario is that you won’t need life insurance anymore (you are near retirement, your mortgage is almost paid off & your kids are out of the house!) If this is you, you can let your policy expire and never look back.
If you still need insurance, you have two options. If you are still pretty healthy, you just apply for a brand new policy (at higher rates). If you’ve been diagnosed with a pretty severe illness, the good news is that you are still covered. That is because term insurance comes with a pretty standard feature called “guaranteed renewability." In other words, if you still need the insurance after the term expires (for example, 10 or 20 years down the road), you can renew the policy without having to show proof of new health conditions or go through additional medical underwriting. This provides you with some protection against getting sick because your renewal rates are guaranteed.
What is whole life insurance?
Whole life insurance pays out a benefit to your beneficiaries no matter when you die. That is why is it categorized as ‘permanent life insurance’. Permanent insurance is much more expensive. Why? Because it guarantees that your beneficiaries will receive your death benefit. You can die young or die old, and your insurance company will still pay out your benefit.
Whole life insurance includes a death benefit (just like a term life insurance policy does) and a cash surrender value. Before we explain what a cash surrender value is, let’s talk about premiums.
With a whole life insurance policy, the premiums you pay during the early years are usually higher than the amount needed to cover the risk of your death. These “excess premiums" form the policy’s cash surrender value.
In other words, your insurance company takes the amount of money that you’ve overpaid by during the early years and places it in a bank account with your name on it. Each year, the insurance company invests this money. This allows your account to accumulate interest, which increases your cash surrender value. As you get older, your probability of dying (and, therefore, the cost of your insurance) gets higher. (It’s no secret that you aren’t going to live forever).
When you reach a certain age, the premium you pay for your policy won’t be enough to cover the cost of your insurance. At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.
This structure allows you to pay the same premiums every year throughout the policy, even though the cost of your insurance technically increases over time. If you decide to cancel your policy at any point, you’ll receive the cash surrender value of the policy (the amount of money that you previously overpaid by).
But be careful: cancelling a whole life insurance policy can come with penalties and additional charges (just like when you try to cancel your phone or cable plan).
These penalties and charges can significantly reduce the amount of money you get back.
What is universal life insurance?
Although it can seem more complex, universal life insurance gives you more flexibility than whole life insurance policies do. It combines life insurance with tax-advantaged investing. Like with whole life insurance, part of your universal life insurance premium is used to cover your death benefit whereas the rest is invested.
The investments form the cash value of the policy. In this case, however, your insurance company gives you some flexibility to choose how and which funds you’d like to invest in.
Universal life policies are expensive. That’s why in general, you should use them for a combination of life insurance protection and long-term savings needs.
Term vs. whole life insurance
For most young families, term life insurance is the way to go. Having life insurance protection for longer than you actually need it for may not seem like such a bad thing. But why pay for something you don’t need? Term life insurance lets you pay for coverage only during the years when it really matters (when your mortgage is at its highest & you have young kids).
If you’d like to read up on why we almost always recommend term life insurance to our customers, start here.
Here is a cheat sheet for comparing term and whole life insurance
|Term life insurance||Whole life insurance|
|Choice of policy length||✓|
|Rates locked in||✓||✓|
|Guaranteed death benefit||✓||✓|
|Accumulates cash value||✓|
What is mortgage life insurance?
Buying a home? You might be asked about whether or not you want to purchase mortgage protection. Mortgage life insurance is typically sold by banks or your mortgage lender. The policy works like this: if you pass away, your insurer guarantees that the remainder of your mortgage will be paid off so that your family can stay in the home.
Mortgage protection insurance and term life insurance fundamentally operate in the same way. You buy a policy, you make monthly payments, and in return, your insurer guarantees that a death benefit will be paid if you were to pass away. However, there are some key differences to be aware of if you’re choosing between the two. Read up on mortgage life insurance here.
What is group life insurance?
Group life insurance is a type of life insurance that you get through work. Many people have at least some life insurance coverage as part of their employee benefits plan. In most cases, group life insurance gives you coverage that’s 1x to 2x your annual salary.
Anything you should know about your coverage through work? One of the main drawbacks of the coverage you get through work is that you lose it if you ever leave your employer. Some of these plans offer options to convert the group insurance to an individual policy upon leaving your employer, but you want to make sure that “no additional medical evidence" will be required. In other words, you want to avoid having to undergo additional medical underwriting again (the reason for this is if you’re diagnosed with any health conditions at an older age, you could see your premiums skyrocket).
To learn more about this coverage, or to find out if it is enough - click here!
When is the best time to get life insurance?
The best time to get life insurance is when someone depends on you. For most people, this is when they get married or when they start having kids.
We know what you’re thinking: “But I just got a mortgage, and having kids isn’t cheap! How am I supposed to afford life insurance?"
Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it’s smart to lock in a low monthly rate when you’re young because it’ll stay at that price for the entire term of your policy.