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Types of life insurance -- what’s best for you?

There are many factors when you’re shopping for life insurance. There are almost as many options to get coverage. 

Understanding the differences between policies is vital. 

The two major life insurance categories are term and permanent life. The significant difference between them is that term life covers you for a period; permanent life is for your entire life. Each type brings its own positives and negatives. 

Let’s take a look at the term life, permanent life and final expense insurance so that you can make the best life insurance decision for you. 

 

Term life insurance

Term life is often the simplest and most affordable life insurance. Term life insurance serves the basic function of ensuring that your beneficiaries receive a payment if you die while the policy is in effect. Types of life insurance

Premiums can be level term or may increase over time. It depends on which type of term policy you choose. 

A policy with level term may have higher payments at first, but it’s consistent. Choosing a policy that allows for differing premiums means you may pay less at first, but you’ll fork over more money as you get closer to the end of the term policy. 

If you’re young and not making much, you may prefer a term policy with lower premiums to start. However, if stability is what you’re seeking, going with level term payments is your best bet. 

A term life policy works similarly to car insurance. You make payments and your life insurance company takes on the financial risk of your death during the policy term. 

Usually, terms are offered at 10, 15, 20 or 30 years. Here’s an example. Let’s say you buy a 20-year life term policy with $300,000 coverage. You make all your payments and die within 20 years. Your loved ones get a death benefit payment for $300,000. 

"Term life insurance provides a death benefit only," said Robert E. Maloney, chief listener -- fee only financial advisor, at Squam Lakes Financial. "Miss a premium payment and the policy will lapse."

 

Permanent life insurance

Permanent life insurance is a type of policy that pays a death benefit regardless of when you die -- as long as you make your payments. The most common type of permanent life insurance is whole life insurance.

Whole life provides life-long protection and a set amount of coverage, as long as you pay the premiums your entire life. It carries with it a savings component called "cash value.” 

The insurer invests parts of the premiums to build cash value. This allows you to access the cash as the funds grow. 

A whole life contract is designed so that you can take advantage of the cash value. Your beneficiaries only receive the death benefit when you die -- not the value that's accumulated.

Whole life policies tend to pick up speed over time, with earnings growing faster than your "mortality cost" (which is the cost to insure you) at some point. Then, you could take those earnings and put it toward your premium payments.

Permanent life plans offer riders. These add-ons to your policy can include: 

  • Long-term care
  • Critical illness
  • Return of premium
  • Accidental death and dismemberment
  • Child protection

All of these provide supplemental coverage that goes beyond a death benefit. Find out more about life insurance riders

 

Term life vs. whole life insurance

There are fundamental differences between term life and whole life insurance: 

  • Term life insurance provides coverage for a specific period, with 10, 15 or 20 years being the most common term lengths.
  • Whole life is for your entire life. 
  • If you outlive your term life policy, you'll have to shop for another one if you want coverage. 
  • A whole life policy does not expire…until you do.
  • Your premium for term life increases either increases over time or is set depending on the policy.
  • Whole life premiums are consistent. 
  • Term life usually costs less.
  • Whole life has smaller payouts. 
  • Term life doesn’t offer savings components. 
  • Whole life policies have a cash value component. 

 

Other types of permanent life insurance

Whole life insurance is the most popular of permanent life insurance policies, but there are other options.

Universal life insurance

Universal life (UL) insurance is a type of permanent life insurance policy that lets you vary your premium payments. You adjust your death benefit as needed. This type of insurance requires you to watch your account. You can decide whether you need to make payments to keep your policy active. Some ULs have level premiums. 

"Under the terms of the policy, the excess of premium payments above the current cost of insurance is credited to the cash value of the policy, which is credited each month with interest. The insurance company offers no guarantees and the policy requires an annual review by the agent or advisor each and every year,” Maloney said.

Variable universal life insurance

Variable universal life (VUL) insurance policies tie your cash value and death benefit to an investment account. Here, your cash value and death benefit increase if the investments perform well, but may shrink if they don't. Experts stress that you must really grasp the policy’s intricacies should you choose it.

 

Final expense insurance

There’s another option that’s often lower cost than whole life but comes with a smaller death benefit. 

Final expense insurance, also known as burial insurance or funeral insurance, covers just that. A final expense insurance policy is usually one with a low face value that you purchase directly from your insurance company. It’s usually simple to set up.

Final expense insurance could be a good choice if you can’t get a regular term or whole life policy. This might be because of your age or health. 

Usually, you can get a final expense policy that falls under a simplified issue. In that case, you have to answer medical questions but don't have to take a medical exam. You may also find a guaranteed issue policy, which doesn’t require any questions or a medical exam. 

If you have a serious health problem, you may get what is called a "graded death benefit," which increases the coverage amount over time. 

As with any life insurance policy, you name a beneficiary who will receive the final expense benefit payment upon your death. Your beneficiary is then presumably going to use that money to pay for your services and your other wishes. Once that money is in his or her pocket, that person can technically use it for anything. So, be careful who you name as the beneficiary. 

Also, should your wishes and services cost less than your death payout, your beneficiary gets to keep the difference. 

Keep in mind that while you can get final expense insurance, your term life or whole life insurance could also be used for your funeral or burial or your big memorial party; you've just got to instruct the beneficiary how to use it.

Which life insurance is right for you?

Choosing the right life insurance depends on what you want out of your life insurance. 

  • Do you want an investment piece? 
  • Do you want a simple, no-nonsense coverage benefit that is paid to the people you love when you're gone? 
  • Do you want to protect your loved ones during your peak earning years? 
  • Do you just want enough to pay off your expenses, your funeral and provide for a few mortgage payments? 
  • Do you want to add-on riders? 
  • Do you want level premiums? 

Answering these questions can help you narrow your focus. 

"I am an advocate for cash value insurance," Maloney said. "However, term insurance has its place if it is used for a specific period of time. If used properly and with the understanding that the policy needs to be reviewed each year, as a fee-only financial advisor, I will typically recommend a low-load fixed universal policy for my clients who can afford to make larger premium payments that develop early cash values in the very first year."

Maloney said a family’s situation determines which policy is best for any individual client.

"For young couples facing a mortgage and college education, 20- or 30-year level term may provide the assurance that the family needs at minimal costs. On the other hand, a family further along in life where they are looking for a form of payments that will develop a savings reserve may look to universal life or whole life insurance. Term insurance is always better than no insurance,” Maloney said. 

When deciding on life insurance, make sure to get quotes from multiple life insurance companies. If you need assistance in deciding on coverage, our life insurance advisor can help, too. 

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