Life insurance policies aren’t one-size-fits-all. There are multiple types of policies, with multiple benefits offered, all at different price points.
Before you can select the right life insurance policy for your needs, it’s important to fully understand all the different types of life insurance benefits available, who should select which types, and what to expect when purchasing each type of life insurance benefits.
Term life insurance is a type of life insurance that guarantees your family is paid specific death benefits if you die within a specified term.
Once the original term expires, you can renew it for another term, convert to whole life insurance, or just allow the policy to terminate altogether. Premiums are based on your age when you purchase a policy, your overall health, and your life expectancy.
Term life insurance policies have no value other than the guaranteed death benefit, and they feature no savings component like those found with whole life insurance policies.
When you purchase a term life insurance policy, the insurance company determines your premiums based on the value of the policy, your age at the time you purchase the policy, your gender, and your overall health. In some cases, you may be required to have a medical exam as part of the qualification process for a term life insurance policy.
Term policies come in a period of years, often 10, 20, 25, 30, or 35 years. If you die during this term, the insurer pays the face value of your policy to your beneficiaries. If the policy expires before you die, there is no payout when you do die.
Depending on your insurance company, you may be able to renew your term life insurance policy when it expires, but your premiums will be recalculated based on your age at the time of renewal.
Because the insurance company assumes less risk of having to pay out benefits, term life insurance policies often carry the lowest premiums. This makes them good for people on a budget who want the security of an insurance policy, but who worry about cost.
Whole life insurance is similar to term life insurance in that your family is guaranteed a set death benefit once you pass. However, rather than you purchasing and being covered by the insurance for a term of a number of years, you are covered and pay premiums for the remainder of your life.
In addition to providing a death benefit, whole life insurance also accumulates value over the course of your policy.
This additional cash value can be invested, or taken out or borrowed against for situations where you may need money.
When you purchase whole life insurance, you select the amount of death benefit you want your family to receive.
Your premiums will be based on the amount of benefits you opt for and your overall health at the time of purchasing your policy.
Over time, your policy accumulates cash value as you pay premiums. You can then withdraw directly from the cash value of your policy - decreasing the overall cash value but not the death benefit - or take out a loan against the cash value. Unpaid policy loans reduce your death benefits by the amount you owe your insurer.
Whole life insurance policies tend to be more expensive than other options, but they also provide the option to grow and utilize the cash value on your policy during your lifetime.
For consumers who purchase their whole life policies later in life, or who wish to pay the entirety of their premiums within a set period of time, limited pay whole life insurance is a great option.
With limited pay whole life insurance, you get all the benefits of whole life insurance - lifelong coverage, cash value accrual, and your family gets the stated benefits upon your death - but you pay your premiums for a period of years.
This option often is chosen by people who purchase their policies later in life and who want to build the cash value, or for those who have come into a large sum of money through an inheritance or bonus and who wish to use their life insurance policy as a form of investing.
Limited pay whole life insurance works exactly the same as whole life insurance, except in the period of time where the policyholder pays premiums.
You purchase a policy with a designated death benefit, your policy builds cash value that can be withdrawn or borrowed against during your life, and your family receives that death benefit upon your death.
However, at the outset of your policy you elect to pay the entirety of your premiums in a limited amount of time, often in 10, 15, or 20 years’ time. This leads to larger premium payments on a monthly, quarterly, or annual basis, but this larger up-front expense can help your policy build more wealth over time and can benefit you greatly with its cash value or dividend payments.
Universal life insurance offers lifelong life insurance benefits, but with lower, more flexible premiums than you will find with a whole life insurance policy.
When you purchase a universal life insurance policy, you choose the amount of your death benefits, similar to purchasing any other type of insurance. However, when your premiums are quoted, they are made up of two components - the cost of insurance (COI) and cash value.
In order for your policy to remain active, you must always pay the COI portion of your premiums. This is the minimum amount your insurer requires to keep your policy active and to ensure that your beneficiaries can receive benefits upon your death.
You can then elect, at times when you have more money or if you wish to continue building the cash value of your policy, to also pay the cash value portion of the policy.
Additionally, the overall cost of your insurance increases as you age. This increase can be offset, however, if you have accumulated enough cash value in your policy over time.
To purchase a universal life insurance policy, you begin the process much the same as purchasing a whole life insurance policy. Your insurer then determines how much your premiums will cost you based on factors such as your occupation, your overall health, and your family history.
The premium quote you receive will be just for the COI, or the least amount it will cost to maintain your policy. Any additional you choose to pay above this amount gets added to the cash value and accumulates interest.
Over time, if you’ve paid enough into the cash value of the policy, you may be able to skip premiums without your policy lapsing.
Term-to-100 life insurance provides you with permanent life insurance with premiums due until you reach 100 years old. Your family still receives the benefits even if you die after you turn 100, but premiums are only payable - and usually are level unless you make changes to your coverage - until that time.
People who choose this option often do not want to pay the higher premiums from a whole life insurance policy, or they don’t think the cash value portion of a whole life policy is necessary. Additionally, those to purchase term-to-100 want to protect their families, but want to avoid the premium increases that come with purchasing additional term policies later in life.
Term-to-100 life insurance offers more affordable premiums than whole life insurance, but with the guarantee that your family will receive benefits even if you don’t die until you are much older. The premiums you pay with term-to-100 tend to remain level throughout your life, provided you don’t make any changes to your coverage, and are often more affordable the younger you are when you purchase coverage.
While mortgage life insurance isn’t technically a type of life insurance, it is a benefit that policyholders elect to carry in the hopes that the benefits will cover their mortgage payments if they die.
Mortgage life insurance is often sold by banks that are affiliated with lenders, and tend to target people who are in poor health or who have poor medical histories. These people often don’t qualify for traditional life insurance or they only can get life insurance with high premiums.
However, because there are a great deal of types of life insurance policies available, and a wide variety of insurers offering life insurance, they may have more options by shopping around a bit more.
Mortgage life insurance is only designed to cover the remainder of your mortgage if you die prior to it being paid off. Because of this, mortgage life insurance only provides the highest monetary benefits if you should die shortly after buying your policy or buying your house; your benefits decrease in value as the balance on your mortgage decreases.
This type of policy can be beneficial to your family in the event that you pass away before your mortgage is paid off, but they cannot use the funds in any way other than to pay off your mortgage.
In most cases, it’s much more beneficial - especially given the notably high premiums of most mortgage life insurance policies - to purchase a lower-cost term life insurance policy and ensure that the benefits you select will be enough to cover at least your mortgage payoff.
Funeral expenses insurance, also called burial insurance, is designed to cover just the cost of your funeral or cremation expenses.
Typically, funeral expenses insurance runs on the lower range in terms of benefits, usually from $5,000 to $25,000. The money your family receives from this type of policy is paid directly to them, so if your funeral expenses come in below the overall payout, the beneficiaries can use the money to cover outstanding medical expenses, legal bills, or other debts you may leave behind.
Funeral expenses insurance is among the most low-cost of all types of life insurance, as the benefits paid out are lower than with other traditional life insurance policies.
Many people who don’t feel they can afford the premiums of regular life insurance policies, or who may not be able to qualify for traditional life insurance, opt for funeral expenses insurance to help their families financially.
In situations where you may face an expensive chronic illness, such as cancer, heart attack, or stroke, your regular health insurance plan may not be enough to cover all your medical bills.
Unlike traditional life insurance policies, you can receive the benefits of a critical illness insurance policy prior to your death, at a time when you’re dealing with a critical illness. These benefits can cover costs not covered by your medical insurance, and also can go toward other costs related to your illness, such as transportation to and from appointments, child care, and modifications to your home to accommodate your illness.
Coverage limits vary based on the insurer, ranging from a few thousand dollars to up to $100,000.
Critical illness insurance is a separate policy you purchase over and above health insurance or another life insurance policy. In many cases, these benefits are offered as riders to term or whole life insurance policies.
When you are diagnosed with a critical illness, you will receive the benefits in a lump sum in most cases. You then use that money to pay for costs as you see fit.
One of the first, most basic decisions you’ll have to make when selecting life insurance is what type of policy you want to carry. This answer is greatly up to each individual, so you must carefully consider and balance your wants and needs to find the policy that’s right for you.
If you’re concerned about cost, a term life insurance policy is probably the best option, and you can customize the length of the term depending on your age and the anticipated financial needs of your family over time.
For those who want the cash value portion of a life insurance policy, or who want to ensure they’ll be able to leave benefits for their family regardless of age, a whole life insurance policy is likely the best choice.
If you need help finding the right life insurance policy and carrier for your needs, Insurdinary is here to help. Compare plans and premiums, get a quote, and get covered quickly. Get a quote today!