Types of Life Insurance
Many different types of life insurance are available to meet all sorts of consumer needs and preferences. Depending on the short- or long-term needs of the person to be insured (or their family members), the choice of whether to select temporary or permanent life insurance will be a major consideration.
Term life insurance
Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life insurance policies balance affordability with long-term financial strength.
- Decreasing term life insurance is renewable term life insurance with coverage that decreases over the life of the policy at a predetermined rate.
- Convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
- Renewable term life insurance provides a quote for the year the policy is purchased. Premiums increase annually at renewal. These plans usually provide the least expensive term insurance in the first year.
Many term life insurance policies allow you to renew the contract on an annual basis once the original term ends. However, since the renewal premiums are based on your current age, the cost can rise steeply each year. A better solution for permanent coverage is to convert your term life insurance policy into a permanent policy. This is not an option on all term life policies, so look for a convertible term policy if this is important to you.
Permanent Life Insurance
Permanent life insurance is more expensive than term, but it stays in force throughout the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. Some policies allow for automatic premium loans when a premium payment is overdue.2
- Whole life insurance is one type of permanent life insurance where the premium and death benefit generally remain the same each year. It includes a cash value component, which is similar to a savings account. Cash-value life insurance allows the policyholder to use the cash value for many purposes, such as to take out loans or to pay policy premiums.
- Universal life (UL) insurance is another type of permanent life insurance with a cash value component that earns interest. Universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time. It also provides options for a level death benefit or an increasing death benefit.
- Indexed universal life (IUL) is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component.
- Variable universal life (VUL) insurance allows the policyholder to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level or increasing death benefit.
Term vs. Permanent Life Insurance
Term life insurance differs from permanent life insurance in several ways but tends to best meet the needs of most people looking for affordable life insurance coverage. Term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired. That’s in contrast to permanent life insurance, which stays in effect as long as the policyholder pays the premium. Another critical difference involves premiums—term life is generally much less expensive than permanent life because it does not accumulate cash value.
Before you apply for life insurance, you should analyze your financial situation and determine how much money would be required to maintain your beneficiaries’ standard of living or to meet other financial needs for which you’re purchasing a policy. Also, consider how long you’ll need coverage to last.
For example, if you are the primary caretaker and have children two and four years old, you would want enough insurance to cover your custodial responsibilities until your children are grown and able to support themselves.
You might research the cost of hiring a nanny and a housekeeper or using commercial child care and cleaning services, then perhaps add money for education. Include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation—especially if the spouse earns significantly less or is a stay-at-home parent. Total what these costs would be over the next 16 or so years, add a little more for inflation, and that’s the death benefit you might want to buy—if you can afford it.
Burial or final expense insurance is a type of permanent life insurance that has a small death benefit. Despite the name, beneficiaries can use the death benefit as they wish.
What Affects Your Life Insurance Premiums and Costs?
Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before (and even after) applying. Your health and age are the most important factors that determine cost, so buying life insurance as soon as you need it is often the best course of action.
After being approved for an insurance policy, if your health improves later and you’ve made positive lifestyle changes, you can ask to be considered for a change in risk class. Even if it is found that you’re in poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health, then you your premiums may decrease. You may also be able to buy additional coverage at a lower rate than you initially did.
