There is no one-size-fits-all type of life insurance policy. Choosing the basic type alone — is a term life or permanent life insurance policy better? — depends on how much coverage you need, how long you need to maintain this coverage, and a number of other factors.
To narrow down which life insurance policy would work the best for you, there are 10 questions worth asking yourself and your life insurance agent.
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What Type of Life Insurance Policy Should I Get?
To determine what type of life insurance policy is best for you, consider the people who rely on your income and how much they would need to survive in your absence.
Some insurance policies pay out large amounts upon your death and others offer much more limited amounts. If you do not have any dependents, such as if all of your children are grown and financially independent, you may not need a policy that provides a large death benefit. A policy that only covers burial costs and settling your outstanding debts may be sufficient. On the other hand, if you have multiple dependents or are the main wage earner in a household, a policy with a larger death benefit could ensure your dependents are protected in the event of your death.
Learn more about the most common types of life insurance policies to see which best fits your circumstances and needs.
Term Life Insurance
Term life insurance is designed to be in effect for a specific period of time at a set price. Once that term is up, if the policy has not be converted to another type of insurance, the term will usually renew at a higher price or coverage will end altogether. Term policies typically last from 5 to 30 years.
Term life insurance is usually less expensive than permanent life insurance, making it a good option if you’re trying to cover your bases in case of an emergency. A prime example of someone who would benefit from term insurance coverage is a healthy, young adult with no dependents. Being young and healthy, your term life premium would likely be low. Because there is no one who relies on your income, you could opt to pay this lower premium for a smaller death benefit, allowing you to still have life insurance coverage without the higher premiums of permanent life insurance.
Bear in mind, however, that term life insurance premiums increase with every renewal, so it is not the best long-term solution for life insurance coverage.
Whole Life Insurance
Whole life insurance is a permanent form of life insurance that may include a savings component, which accumulates cash value at a fixed rate on a tax-deferred basis. Whole life is more expensive than term life because it guarantees a cash value and level premiums, whereas term life insurance has no cash value and the premiums can increase with each renewal. There are no renewals for whole life policies, as the policy remains active as long as premiums are being paid.
Whole life also offers policyholders the option of tapping into the cash value through a withdrawal, a loan, or surrendering the policy. This could be used for anything, including as supplemental retirement income or as an emergency fund. Depending on your specific policy and the amount you withdraw, you may have to repay the amount you take or pay taxes on it.
Whole life policies are best for those who are looking for long-term coverage and stable cash value growth over time, such as adults with financial dependents or who would like to use the cash value as part of their retirement income.
Universal Life Insurance
Universal life insurance is a type of permanent life policy that can stay in effect until death as long as it is funded. There is a cash value feature to universal life, but it’s more flexible than a whole life policy in regards to how you can accumulate the cash value in the account. For example, you can adjust your premiums within your policy’s set minimums and maximums, allowing your cash value to grow slower or faster. However, keep in mind that sticking with the minimum premium could result in underfunding your policy over time.
One example of how universal life insurance could be useful is if a young parent wants to provide financial protection for their dependents, but is on a stricter budget while they advance their career and earnings. They could use the flexibility in premium payment amounts during the leaner times, and have the accumulated cash value act as an emergency fund.
Final Expense Life Insurance
Final expense life insurance is intended to provide coverage for funeral and burial expenses. It’s designed for older people who are establishing end-of-life plans. It might be the sole life insurance policy needed, or it could be added as a supplemental policy.
This type of insurance could be expensive, but may be the only insurance you can get if you are considered high risk or have significant health issues. Final expense life insurance could best suit someone who does not have any financial dependents, and who is of advanced age or in failing health. The coverage ensures the policyholder’s surviving friends or family members do not have to shoulder the entirety — or any, depending on the amount of death benefit set — of the burial costs.
Simplified And Guaranteed Issue Life Insurance
Both simplified and guaranteed life insurance policies are set up for people who have significant health concerns. While other life insurance policies may require a medical exam, simplified life insurance and guaranteed life insurance do not have this requirement, making it a good choice if you would be denied standard life insurance due to health concerns. However, there may still be a health questionnaire that applicants must answer. These policies tend to have higher premiums.
Guaranteed life also has graded benefits, which means there is a time period in which the policy may not pay out the entire death amount. This time period is typically a few years, and is designed to discourage someone from purchasing this type of policy while in poor health and expecting full benefits if they pass away a short time later.
How Much Life Insurance Do I Need?
How much life insurance you need depends largely on your debts, dependents, assets, and other factors. There are several methods for calculating the amount of death benefit needed, including multiplying your annual income by 10, or the DIME method, which considers debt, income, mortgage, and education. Both of these methods work well, though to get the most accurate estimate, the following factors should be considered:
- Your dependents and their ages. A young child may rely entirely on your income, while an older child may need less as they generate their own income.
- Financial obligations. This includes any outstanding debts, such as mortgages, credit card balances, business loans, or personal loans.
- Future education costs for children. If you plan to support your child’s college tuition, it should be factored into your death benefit amount.
- Anticipated funeral expenses. This could include the cost of burial and the funeral service.
- Income, now and future. Consider how much you could contribute to your life insurance policy.
- Assets. This includes financial assets like stocks and bonds.
- Other active life insurance policies. For example, you may have a death benefit that accounts for your mortgage through a separate mortgage life insurance policy, making it unnecessary to factor your mortgage into any other life insurance policy.
How Much Can I Expect To Pay For My Life Insurance?
The type of policy you select plays a big role in the overall cost of it, but your age and health are also important factors. In general, the younger you are, the less expensive your life insurance premiums will likely be. But while you have no control over your age, there are factors that you can influence:
- Health (including BMI). Most life insurance companies assess your overall health when determining costs, looking at past, present, and recurring health issues. Doing as much as you can to improve your health can help keep your life insurance costs down.
- Tobacco use. Those who smoke or use chewing tobacco products pay more for life insurance.
- Hobbies. Those with risky hobbies, such as hang gliding, are seen as bigger risks.
- Criminal history. This includes DUIs.
- Occupation. Those with high-risk jobs, like deep sea commercial fishermen, typically see higher life insurance costs.
These things help insurers build a risk profile for you as an individual. For this reason, the price of an individual life insurance policy varies widely. Depending on the factors above, the type of insurance you select, and the amount of coverage you want, costs can range from a couple hundred dollars a year to thousands of dollars a year.
Term Life Insurance Estimator
Will My Life Insurance Policy Have Living Benefits?
Term insurance has limited living benefits and it does not have cash value, but whole and universal life insurance do have a cash value element that can be accessed while living. This means you can withdraw money from the policy to pay for expenses while you’re still alive.
Usually, this money is withdrawn to pay for end-of-life care and medical expenses so your beneficiaries aren’t responsible for these bills. However, keep in mind that using this money from the policy reduces the final payout. The following are some types of qualifying living care benefits.
Long-term and Short-term Care
Usually offered as a rider on life insurance plans, both long- and short-term care are designed to help when you can no longer attend to your basic needs. This doesn’t necessarily only apply to end-of-life situations. For example, it can be used if you have an injury, temporary impairment, or are recovering from surgery and need a care facility.
Short-term care typically has a defined outcome. Once you’re able to resume care for yourself, you leave that facility and you will not continue to need living benefits. Long-term care is typically considered a permanent situation, and it is designed to improve your quality of life while also providing access to assistance when needed. Common scenarios where long-term care is needed is after experiencing a stroke, suffering from chronic debilitating symptoms, or if you have a permanent disability.
Early pay is also referred to as accelerated benefits, and it’s designed to help with medical costs if you have a terminal illness with death expected within two years, or a catastrophic illness. Exact eligibility criteria varies by the individual insurer and policy, as well as the state you live in, as early pay benefits may be subject to state regulations. Keep in mind that taking money out of life insurance to pay your medical bills will decrease the final amount paid to beneficiaries.
Will I Need to Get a Physical Exam?
The type of life insurance you select along with the amount of coverage set, your age, and your health history will determine if a medical exam is necessary. While simple and guaranteed life insurance do not usually require physicals, most other policies do. The insurance provider will also look at your risk level and determine if your health, hobbies, and profession put you in a higher risk category.
Will My Premium Change Over Time?
The type of life insurance policy you choose will dictate the rate of your premiums, but overall, whole life coverage features the same premium throughout the policyholder’s life. Most term life insurance policies start with a low premium at a fixed rate for a period of time. Then, after that initial period is over, the premiums could increase if the policy is renewed. As another option, universal life insurance allows the policyholder to adjust the premium amounts within a certain range based on their needs and the cash value of the policy.
How Do I Set Up My Life Insurance Policy’s Death Benefits?
As the policyholder, you decide who will receive the death benefits of your life insurance policy. Your beneficiary, or beneficiaries if you have named more than one, can then structure payments at the time of your passing to get the payout all at once, receive them in monthly payments, or have the money put into a savings account.
Life insurance death benefits are not usually subject to ordinary income tax. To get paid for a life insurance policy when someone dies, you’ll have to contact the insurance company and provide proof of death, usually with a death certificate. The insurance company will review the claim and may require all beneficiaries to complete a death claim form before dispersing benefits.
What Happens if I Miss a Payment?
Missing a payment usually doesn’t automatically terminate a life insurance policy, but each policy is different and knowing the specifics of your policy is important. Many insurance companies offer a grace period of 30 to 60 days, giving you a chance to catch up on the missed payment. If payment isn’t made within the grace period, your life insurance can lapse and your beneficiaries will not be paid if you die after your coverage has stopped.
Some insurers allow the policyholder to reinstate their policy if they can make the missed premium payments. However, if too much time has lapsed since the missed payment, you may need to complete a health questionnaire or medical examination to reinstate the policy. This sort of flexibility is more likely to be found in a permanent life policy rather than in a term life policy.
Can I Cancel My Life Insurance Policy?
Yes, you can typically cancel your life insurance at any time without paying a cancellation fee. However, some policies may have surrender charges if you cancel within the first few years of activating the policy.
Keep in mind that there is a “free look” period for all life insurance policies purchased in the United States. That period can be anywhere from 10-30 days from the day you receive the policy, and you have the right to cancel and get your premiums fully refunded in that period. After the free look period is over, you’ll have to review your specific policy to see if there are surrender fees.
If you have term life insurance, you could notify your insurer about canceling your coverage and then stop paying the premiums. As there’s no money due to you at this point, there’s nothing else involved with the cancellation process.
When you have whole or universal life insurance, however, there is a cash value component that can make cancellation more complex. For example, you would have to determine with your insurer whether you have enough cash value to be paid out for it. This is typically the case if you’ve had the policy for a long time, as you have spent time growing the cash value. In addition, there may be taxes due if you cash out on a life insurance policy.
As a general rule, it is always better to formally cancel a policy rather than letting it lapse so you don’t incur any additional fees. If you are considering canceling your policy to change to a different one, however, you may be eligible for a 1035 exchange instead, depending on your current policy type and your next policy type. This would allow you to change insurance plans and roll the cash value over to your new policy without having to cash out your current policy and pay taxes on it.
What if My Health Changes?
Most life insurance policies are designed to be a long-term contract, meaning it is expected for your health to change throughout the course of the policy. This will not necessarily impact your premiums. However, it is possible to decrease your premium if your health significantly improves, such as if you recover from an illness or have quit smoking.
Conversely, if your health begins to worsen, you may be able to access additional benefits from your life insurance policy, depending on your policy type. For example, you may be eligible for some living benefits to help pay your medical bills. In addition, if you become disabled, there are some insurance policies that are designed to help you recover or adapt. Look over your policy or speak with an insurance representative to see if your policy contains any extra benefits that could help you if your health declines.
Overall, there is no need to inform your insurance company if your health changes because insurers do not expect your health to stay the same throughout your life. The only time you may want to inform your insurance company of a change in health is if you believe it’s a significant positive change that could make the case for a lower premium, or if you need to access your policy’s living benefits in the event of a health decline.